Sakari

Sakari: Announced very poor set of 1Q12 results, which was below estimates, and a stark contrast to last qtr’s blowout results. Rev at US$188.8m, -16% yoy and -39.6% qoq, while net profit at US$14.5m, -65% yoy and -80.1% qoq. Gross Margins plunged to 20.2% vs 34% yoy and qoq. Poor results were mainly due to poor contributions from both its Sakari and Jembayan mines. In Sebuku, work in the qtr saw a significant amount of development work for the future, such as river diversions, mud stabilisation, drainage channels and protective bunds, although mgt has highlighted that Sebuku remains slightly ahead of its ramp up schedule and the robust start to 2012 has lifted the mine’s production target for the year to not less than 2.5Mt. Jembayan mines were faced with appalling weather conditions, restricting access to mine’s deep pits for long periods. Grp’s original 2012 mine plan was to open two new pits later in the yr but, faced of adverse weather conditions, decision was taken to accelerate work to open new pits. Therefore fleet was concentrated towards south of concession with emphasis on development work rather than coal extraction, resulting in high strip ratios, low coal production and production costs being concentrated on that lower coal output. Going forward, grp confident on prospects, noting that both China and India are returning to mkt and placing orders for additional vol of coal. Emphasis for production growth in 2Q will remain firmly on Sebuku with its high margins and attractive product. Jembayan is preparing the mine for higher production when mkt strengthens and Grp will stay focused on mine’s margins. Highlight that in current conditions, cost savings spread over an entire production base can be more profitable than a strategy to produce higher vol at lower margins. Grp is therefore positioning its mines, particularly Jembayan, for an expected upturn later in the yr. Merrill Lynch concludes that while there is potential share-price overhang on the regulatory front and coal price headwinds, house see an enhanced buying opportunity for SAR after 1Q results. After all, the share price has corrected more than 20% since the release of 4Q results and now trades more than 1STD below its historical mean P/E. Ratings as follow: Macquarie maintains O/p with $3.50 TP. Note that only way now is up. Merrill maintains Buy with $2.40 TP. Goldman maintains neutral with $2.20 TP.