Sakari

CIMB downgrades to Sell with $1.01 TP. House cut oFY12-14 ASP assumptions by 3-23% as see risk of prolonged coal price weakness. FY12-14 EPS estimates are now 14-52% below consensus. Note that Newcastle benchmark has fallen 23% since the start of the year due to excess supply from non-traditional sources, such as the US, as coal is substituted by cheap shale gas. US utilities, laden with take-or-pay contracts with miners, have been compelled to dump unwanted coal on Asia, forcing prices down. Excess coal supply from non-traditional sources remains a roadblock to a recovery. Sakari estimates that the US still has 40-50Mt of distress coal, implying further pricing pressure. House also expect Sakari to scale back on production amid weak market pricing. Volume cutbacks stem from Jembayan, which is more susceptible to ASP cuts due to its higher cost structure vis-à-vis Sebuku, where margins are fatter due to lower cash costs and higher selling prices. Add that during the GFC, demand weakness was cyclical, today, the industry grapples not only with a cyclical pullback in demand but also a structural shift in energy consumption patterns given the emergence of cheap shale gas.