Sakari

Sakari: DBSV maintains Buy but cuts TP to $1.80 from $2.40. House note that share price decline has more than priced in impact of current coal price weakness on earnings. Expect coal price to stage a mild rebound in 2H12. Maintain BUY for potential to play this rebound; downside limited by healthy dividend yield of 6%. Increasing production is not the priority, producing smartly is more important. Given finite coal reserves, producing more in a low price environment may not be ideal over the long term. Hence, mget should retain flexibility in managing production levels, especially at Jembayan, where margins will be tight at current spot prices owing to high cash costs. Production can be increased if coal prices rebound. Sebuku mine, with its higher-grade coals and low cash costs, remains very profitable even at current prices and should be the key driver for SAR’s profitability in the near term.