• Expect a spike in coal production to 1.3mn tonnes in FY18e.
• Award of Riau 1 mine-mouth power plant project will triple coal sales. But funding will need to be addressed.
• Initiate with Trading BUY and a target price of S$0.16.

1. Jump in production:  Production of SB only started in FY16 with 30,000 tonnes of thermal coal. In 1H17, production touched 57,000 tonnes. We expect production to spike up to 1.3mn tonnes for FY18.

2. New offtake customers:  BNR has secured four large customers for SB, with the rise in power consumption in Sumatra, we do not rule out the company securing even more customer or increased demand from existing customers. Power consumption in Sumatra has been growing 9% p.a. the past five years. This is expected to rise even faster to 11% p.a. from 2017-2026 or double in six years, according to PLN (RUPTL).

3. Riau 1 will triple coal sales:  SB will be the exclusive supplier of coal to Riau 1 power project (2x300MW). This project requires 3.5mn tonnes of coal per annum and can triple FY18e production. In addition to the large volume, another advantage of being a mine-mouth power plant coal supplier is the selling price of coal is benchmarked at production cost plus a margin. This provides income stability and bankability for the project.

Figure 29: Of the three concession, only SB has reserves and production

Investment Thesis

1) Share price driver 1: Coal production and sales ramp

SB only started production in FY16 with 30,000 tonnes. We expect this to spike to 1.3mn tonnes in FY18e. A risk to production will be further delays by customer Santosa and Soma. Both are earmarked for power plants.

Figure 32: Breakdown of our FY18e coal sales estimate

 

2) Share price driver 2: More new customers

Over the last 12 months, SB has secured two major customers &ndash PLN Tenayan and Semen Padang (Figure 32). We do not rule out the company securing even more customer or increased demand from existing customers, in view of the increasing demand for power in Sumatra. Power consumption in Sumatra has been growing 9% p.a. the past five years. This is expected to rise even faster to 11% p.a. from 2017-2026 or double in six years, according to PLN (RUPTL).

3) Share price driver 3: Award of Riau 1 power plant project

The big opportunity will be the award of Riau 1 power project. BNR will enjoy two sources of profits from Riau 1 mine-mouth. The first profit will be supplying on an exclusive basis, 3.5mn tonnes coal per annum to the power plant, for 30 years. This will triple 2018e production*. Secondly, BNR is able to enjoy profits generated by the Riau 1 power project itself.

* Based on the Independent Qualified Person&rsquo s Report (&ldquo IQPR&rdquo ), SB can report US$30m PATMI with Riau 1 coal supply (but this excludes financing cost).

Figure 33: Some Details of Riau 1

Investment risk

The largest risk to our investment thesis is funding of Riau 1 opportunity. There will be two areas of funding required. Firstly, to expand coal capacity by 3.5mn tonnes, BNR will require capital expenditure of around US$60mn. This was highlighted in the IQPR (10 Aug17) Secondly, BNR intends to take a stake in the Riau 1 power plant project. There have been no details of the cost of the project. Our estimates are based on other power plant projects is a capital expenditure of around US$900mn. Assuming 30% equity funding for Riau 1 and BNR takes a 20% stake, it will cost BNR US$54mn.



Valuation

We are assuming BNR earns US$10.9m PATMI in FY18e. This is on the back of 1.3mn tonnes coal sales and ASP of US$40/tonne with a cash cost of US$25/tonne.

We are pegging BNR valuations to regional peers. This gives us a valuation of around 10x PE. This gives us a target price of S$0.16 (assuming US$1 = S$1.36). We think BNR should trade in line with industry due to its high growth in production.

Worth noting that our PATMI is sensitive to our assumptions. Every 1% change in ASP is 4% impact to PATMI. And every 1% change in cash cost has similar 1% impact to PATMI.

Figure 36: We estimate FY18e PATMI of S$10.9m