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Singapore Company Focus

Sakari Resources Ltd Bloomberg: SAR SP

|

Reuters: STRL.SI

DBS Group Research . Equity

30 Aug 2012

ACCEPT THE OFFER @S$1.90

A bird in hand or two in the bush?

Current Price S$1.90

 PTT offers to buy remaining stake in Sakari @S$1.90 per share

STI : 3,041.57 Price Target : 12-Month S$ 1.90 (Prev S$ 1.40) Reason for Report : Proposed mandatory cash offer DBSV vs Consensus: Lower, more conservative coal price estimates

 But longer term investors with bullish coal price outlook could still look to hold on

Analyst Suvro SARKAR +65 6398 7973 [email protected]

PTT bid to privatise Sakari. Thai energy major PTT – which already controls 45.4% of Sakari Resources – has made a mandatory cash offer for the shares it does not own in Sakari at S$1.90 per share. The offer is now wholly unconditional, and is expected to be completed by October 2012. PTT plans to delist Sakari from the SGX if acceptances exceed 90%.

Price Relative S$

R e la tiv e In d e x

3 .5

213 193

3 .0

173 2 .5

153

2 .0

133 113

1 .5

93 73

1 .0

53

0 .5 A u g -0 8

A u g -0 9

 Offer price looks attractive at valuations of US$12 per reserve ton and 16x FY12 PE, considering the lack of other near term catalysts for the stock

A u g -1 0

Sa k a ri R e so u rce s Ltd (LH S )

33 A u g -1 2

A u g -1 1

R e la t iv e S T I IN D E X (R H S )

Forecasts and Valuation FY Dec (US$ m)

2010A

2011A

2012F

2013F

Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)

737 139 126 88 88 9.8 9.8 (34) (34) 9.8 4.8 58.2 19.4 19.4 22.8 13.9 2.5 3.3 0.4 17.7

1,014 273 259 190 190 21.1 21.1 115 115 21.1 12.7 69.9 9.0 9.0 6.4 6.8 6.7 2.7 0.2 33.0

885 182 170 109 109 12.1 12.1 (43) (43) 12.1 7.3 74.6 15.7 15.7 10.9 10.3 3.8 2.5 0.2 16.8

997 188 179 126 126 13.9 13.9 15 15 13.9 8.3 80.2 13.7 13.7 8.9 9.9 4.4 2.4 0.2 17.9

B: 4

13.5 S: 1

17.3 H: 5

Earnings Rev (%): Consensus EPS (S cts): Other Broker Recs:

ICB Industry : Basic Materials ICB Sector: Mining Principal Business: Coal mining company with interests in Indonesia

Source of all data: Company, DBS Vickers, Bloomberg

www.dbsvickers.com Refer to important disclosures at the end of this report ed: SGC / sa: JC

Offer price is reasonably attractive. SAR currently sits on 147m tons of JORC-compliant coal reserves and 1,500m tons of coal resources. The acquisition price translates into US$12 per ton of reserve and US$1.1 per ton of resource. Compared to recent transactions in the coal space, the acquisition price is at the higher end of reserves multiples. In terms of price-earnings multiples, the price looks fair as Sakari’s near term earnings are unlikely to be strong given the dip in coal prices and increase in its mines’ cash costs. The deal values Sakari at 15.7x FY12 and 13.7x FY13 earnings, according to our projections, above its historical midcycle valuation range and at a healthy premium to peers current valuations. But final decision hinges on long term coal price views. The deal seems to be generally a good exit option for minority shareholders, especially given the relatively cooler supply demand dynamics in the thermal coal market currently and ongoing regulatory risks in Indonesia, which limits near term share price appreciation potential. However, investors with a bullish long-term outlook on coal prices may consider holding on to the stock for future re-rating potential as and when coal prices jump beyond US$110/ton levels again, backed by more robust global economic fundamentals. At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders PTT Asia Paciifc Mining (%) PTT Pcl (%) Bank of New York (%) Free Float (%) Avg. Daily Vol.(‘000)

1,137 2,162 / 1,725 45.4 8.8 5.1 35.7 22,811

Company Focus Sakari Resources Ltd

PTT launches takeover bid for Sakari Thai energy major PTT has made a mandatory cash offer for the shares it does not own in Sakari Resources at an offer price of S$1.90 per share. The offer is made through PTT Mining Limited, a wholly-owned subsidiary of PTT International Company Limited, which in turn, is a subsidiary of PTT Public Company Limited, which is listed on the Stock Exchange of Thailand. Before the offer, PTT already controlled 45.4% of the stock through its wholly-owned subsidiary, PTT Asia Pacific Mining Pty Ltd, and will have to shell out roughly US$960m to acquire the remaining stake. The offer price includes the right to receive and retain the interim dividend of 2UScts per share, and since the transaction will not be completed before the date of record for this dividend, the amount of dividends will be deducted from the offer price payable eventually. The offer price represents 28% premium to the last transacted price of the stock, and is attractive at first glance.

Competing offer unlikely. A significant chunk of the remaining shares are held by six large institutional funds comprising, according to Bloomberg: Bank of New York Mellon, Legg Mason, Fortis Bank, Capital Group, Sloane Robinson and Fidelity International – which together hold 29.2% stake. In the absence of any other strategic investor, we do not anticipate a competing offer. Nor will PTT revise up the offer at any stage. The key point for investors to consider is thus, whether the price offered by PTT is reasonable enough, as selling investors could lose out on the upside if the stock stays listed and stock price outperforms to beyond S$1.90 at some point in the future. Given that average share price for Sakari has been above S$2 for many periods in the 6 years since listing, that is not an unlikely scenario and depends largely on the outlook for Sakari’s earnings potential, which again is largely dependent on the outlook for global coal prices. What’s in it for PTT?

Offer premium to prior share price levels Price

Premium

Last transacted price

1.49

27.5%

1-week VWAP

1.47

29.0%

1-month VWAP

1.41

34.9%

3-month VWAP

1.37

39.1%

6-month VWAP

1.54

23.1%

Source: Company, DBS Vickers

Minimum acceptance condition fulfilled. The only condition for the deal to go ahead was that PTT should hold more than 50% of all shares outstanding at the close of the offer. Given that this includes its current 45.4% stake, the threshold was not very steep. Through a series of on-market transactions, PTT’s stake in Sakari stood at 54.17% at the end of trading on 29th August, up almost 10% in 3 days following the offer announcement. The offer has now become wholly unconditional, as its shareholding has exceeded 50%. PTT's primary aim is to increase its shareholding in Sakari to above 50% and take absolute majority control of Sakari. The transaction is not intended to change Sakari’s business strategy and existing mining operations nor the acquisition opportunities being evaluated by Sakari. However, if the acceptance level breaches 90%, PTT may de-list Sakari from the SGX and PTT retains the right to compulsorily acquire all the shares from shareholders who have not accepted the offer at that stage.

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PTT has been trying to grow its coal portfolio in recent years, and it is one of its strategic ambitions to be a significant coal player over the long term. SAR is one of its first investment vehicles to help achieve the same. An unlisted vehicle with higher management control gives PTT the option to invest in more green-field assets, which may only provide returns over a longer time horizon and may not be suitable for SAR's current investor profile. PTT does not have as much expertise in coal historically, so SAR – with its two operating mines in Indonesia, and relationships with major power producers in Japan, Taiwan, Korea and India – offers a good platform to expand its coal business. Why S$1.90? PTT has accumulated its stake in Sakari via two rounds of acquisitions. In early 2009, PTT bought 60% of the erstwhile holding company Straits Bulk Industrial (which owned 47.1% of SAR + stakes in Brunei and Madgascar mines) for US$335m. The approximate implied price for SAR was S$1.25 per share by our estimates. In the second round, when PTT bought out the remaining 40% of the same holding company from Straits Resources Limited for A$544m, the implied price for SAR was S$2.79 per share. Overall, the weighted average cost of investment for PTT for the 47.4% stake in SAR is S$1.87, which might partly explain why PTT chose to go with the S$1.90 price tag this time around. The premium is also attractive enough to ensure high level of acceptance.


How does the offer price shape up against other transactions in the coal space? Wide range of reserves-based multiples. SAR currently sits on 146.5m tons of JORC-compliant coal reserves and 1,500m tons of coal resources. Thus, we estimate the acquisition price translates to about US$12 per ton of reserve and US$1.15 per ton of resource. Adjusted for the 800m ton of resources under Sebuku Western Leases mine, where commercial viability is still uncertain at this point, the acquisition price translates to about US$2.5/ton of resource. Compared to recent transactions in the coal space, the acquisition price of US$12 per ton of reserve is at the higher end of the reserves multiple band, as evident from the table below. A look at the table below tells us that the price per ton of reserve paid by acquirers in other recent transactions can vary across a very wide range – from as low as US$2 to US$27.

We reckon there are a number of reasons for this variation, including but not limited to:

    

Type of coal reserve – thermal or metallurgical Location of mining assets Profitability of mining assets The extent of maturity of a mine Coal resources base, which may vary to a large extent from coal reserve number, as drilling programmes may not have been completed

But the price-to-reserves ton multiple offered for SAR looks attractive, as the price is higher than the mean/ median of prices offered in other deals, especially considering most of the higher multiples seen below are for coking coal assets, which command higher prices and likely higher margins than thermal coal.

Snapshot of acquisition price to reserve multiples offered for recent coal M&As Date Acquirer Announced

Target

Country

Coal Type

Acquisition Price (US$m)

Reserves (m tons)

Acquisition price /ton reserve (US$)

3000

473

6.3

600

200

3.0

Aug-09

Yanzhou

Felix Resources

Australia

Thermal coal

Mar-10

Essar Group

Trinity Coal

USA

Coking & thermal coal

Jul-10

Banpu

Centennial Coal

Australia

Thermal coal

2500

308

8.1

Jul-10

Korea Electric Power

Bayan Resources

Indonesia

Thermal coal

2575

1000

2.6

Nov-10

Walter Energy

Western Coal

Canada, USA, UK

Coking coal

3200

190

16.9

Dec-10

Rio Tinto

Riversdale

Mozambique, South Coking and steam Africa coal

3900

192

20.3

Jan-11

Alpha Natural Resources

Massey Energy

USA

Coking and steam coal

7100

2800

2.5

May-11

Arch Coal

International Coal Group

USA


3400

1100

3.1

Sep-11

Yancoal

Premier Coal

Australia

Thermal coal

300

138

2.2

Oct-11

Peabody

Macarthur Coal

Australia

Met coal, PCI

5100

184

27.7

Nov-11

Winsway

Grande Cache Coal Canada

Coking coal

1000

137

7.3

Dec-11

Yancoal

Gloucester Coal

Coking coal

2100

275

7.6

Australia

Mean

8.3

Median

6.3

Aug-12

PTT

Sakari Resources

Indonesia

Thermal coal

1760

146

12.0

Source: Company announcements, press reports, DBS Vickers estimates

Page 3


Deal looks fairly valued on EV/ Resource ton basis. Unfortunately, we do not have EV/ Resource ton data for enough deals as the resource numbers for some of the deals were not freely available. Given the limited information we have below, though, it seems PTT is getting Sakari’s vast coal resources of 1.5bn tons cheap enough at first glance.

However, we would like to qualify that Sebuku Western Leases (800m ton resources) accounts for more than half of that resource number, and this area at Sebuku is still quite far from being commercially viable. Adjusting for this, we reckon the EV/ Resource ton valuation of US$2.8 is well within the range seen in other transactions.

Snapshot of EV/ resource ton valuations seen in some recent coal M&As Date Acquirer Announced

Target

Country

Coal Type

Acquisition Price (US$m)

Resources (m tons)

EV/ Resource (US$/ton)

Aug-09

Yanzhou

Felix Resources

Australia

Jul-10

Banpu

Centennial Coal

Australia

Thermal coal

3000

1380

2.6

Thermal coal

2500

1934

1.4

Oct-11

Peabody

Macarthur Coal

Australia

Met coal, PCI

5100

1900

2.7

Aug-12

PTT

Sakari Resources

Indonesia

Thermal coal

1760

1500

1.3

700

2.8

(Excluding Sebuku Western Leases)

Source: Company announcements, press reports, DBS Vickers estimates

Deal looks attractive in terms of industry benchmarks for acquisitions in the Indonesian coal sector. Our Indonesian coal analyst believes that generally the acquisition price for green field projects in Indonesia is around US$1/ton of reserve and could be up to US$3/ton of reserve for brownfield mines. However, it is difficult to generalize, and numbers vary widely depending on mine infrastructure and quality of the coal reserves. Moreover, reserve estimates in

Indonesia often tend not to be JORC-compliant and estimates can be non-standardized, thereby limiting like for like comparison. But overall, a price in excess of US$3 per ton of reserve for mature thermal coalmines with decent infrastructure is considered fair. The offer valuation of US$12 per ton of reserve compares very favourably in this regard, likely owing to the more stringent classification of Sakari’s reserves number, as well as its large resources base.

Illustration of some mine acquisitions done last year by Indonesian mining contractor PAMA Date Acquirer Target Announced

Country

Coal Type

Jul-11

PAMA

PT Bukit Enem Energi

Indonesia

Jul-11

PAMA

PT Asman Bara Bronang Indonesia

Jul-11

PAMA

PT Duta Sejahtera

Indonesia

Price Paid (US$m)

Stake

Thermal coal

21

20%

105

110

1.0

Thermal coal

40

30%

133

61

2.2

Thermal coal

12

60%

19

25

0.8

Source: United Tractor/ PAMA company announcement, DBS Vickers estimates

Page 4

Implied 100% Reserves Acquisition price Acquisition Value (m tons) /ton reserve (US$m) (US$)


What about earnings multiples? Price trading range and PE valuation range for SAR Attractive in historical terms and in comparison to current market peer valuations. In terms of price-earnings multiples, the deal looks attractive compared to Sakari’s historical trading range, as Sakari’s near term earnings are likely to be weak given lower prevailing coal prices and higher cash costs at its mines. According to our estimates, the deal values Sakari at about 15.7x FY12 and 13.7x FY13 earnings. This is close to +1 S.D. above its historical mid-cycle valuations of 12x earnings. Based on more bullish consensus earnings estimates, the offer price implies 13.8x FY12 and 10.8x FY13 earnings. The offer is also priced at a healthy premium to current average regional peers’ valuations of about 9.5x FY12 and 8.8x FY13 earnings (see table below).

(x) 30.0

Peak = 26x

24.0 18.0

Offer = 15.7x Mean = 12x

12.0 6.0

Trough = 4x 0.0 J an-07 J an-08 J an-09 J an-10 J an-11 J an-12

+ 2 SD + 1 SD

- 1 SD - 2 SD

Source: Bloomberg, DBS Vickers

Peer Comparison Table

Currency Company Name Code Bumi Resources BUMI IJ IDR Indo Tambangraya* ITMG IJ IDR Tambang Btbr* PTBA IJ IDR Adaro Energy* ADRO IJ IDR Harum Energy* HRUM IJ IDR Borneo Lumbung* BORN IJ IDR Indika Energy INDY IJ IDR Banpu* BANPU TB THB Lanna Resources* LANNA TB THB Arch Coal ACI US USD Consol En. CNX US USD

Price Local$ 670 37,550 14,600 1,360 6,050 520 1,560 446 25 6.3 31.51

Mkt Cap^ US$m 1,462 4,455 3,533 4,568 1,718 966 854 3,876 280 1,337 7,173

FY11-13 11-13 11-13 Reserve EPS FY11 volume ASP Reserve life PE PE P/Bk P/Bk Net EV/ Fiscal CAGR production CAGR CAGR m/ton year 12F 13F 12F 13F gearing Reserve Yr % m tonnes % % x x x x x % x Dec-11 (0.0) n.a. n.a. n.a. 2,904 47.9 7.0 7.0 1.2 1.0 9.7 2.1 Dec-11 (4.2) 25.0 7.7 1.0 294 13.4 8.8 8.9 4.4 3.4 Cash 13.3 Dec-11 14.6 13.0 25.0 0.6 1,990 159.2 9.3 8.3 3.3 2.7 Cash 1.6 Dec-11 8.0 48.0 16.0 (0.5) 889 21.2 7.7 7.1 1.6 1.4 6.6 7.0 Dec-11 16.2 9.0 15.5 (2.1) 123 16.6 9.0 8.3 3.9 3.0 Cash 12.8 Dec-11 (3.5) 3.4 17.6 (2.2) 69 19.0 6.2 5.4 1.0 0.9 0.0 9.3 Dec-11 (99.0) n.a. n.a. n.a. 291 9.3 6.0 7.2 1.1 1.0 62.1 5.2 Dec-11 (16.0) 39.7 7.7 6.4 687 14.0 10.2 8.6 1.5 1.3 83.2 8.7 Dec-11 5.8 4.1 21.3 4.1 34 8.5 9.1 7.5 2.4 2.1 7.1 0.3 Dec-11 n.a. n.a. n.a. n.a. 4,445 27.3 n.a. n.a. 0.4 0.4 125.0 1.2 Dec-11 (18.1) n.a. n.a. n.a. 2,764 44.4 19.3 17.0 1.8 1.7 72.9 3.6

Weighted average - Regional China Shenhua 'H'* Yanzhou Coal 'H'* China Coal 'H'* Hidili Ind.Intl.Dev.* Shougang Fushan Up Energy# China Qinfa Group* Winsway* Southgobi Mongolia Energy# Mongolian Mining

1088 HK 1171 HK 1898 HK 1393 HK 639 HK 307 HK 866 HK 1733 HK 1878 HK 276 HK 975 HK

(3.5) HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD HKD

28.8 12,619 Dec-11 11.2 2,828 Dec-11 6.5 3,442 Dec-11 1.76 469 Dec-11 2.07 1,415 Dec-11 0.85 173 Mar-12 0.95 254 Dec-11 1.02 496 Dec-11 24 563 Dec-11 0.345 301 Mar-12 3.33 1,591 Dec-11

Weighted average - H-shares Sakari Resources*

SAR SP

4.8 (8.2) 5.7 (17.4) (5.6) n.a. (0.0) 5.5 (14.6) (79.7) 57.8

9.5 281.9 50.9 102.8 4.1 6.4 n.a. n.a. n.a. n.a.

8.3 13.5 8.2 13.9 (7.4) n.a. 17.9 29.1 n.a. n.a. n.a.

1.2 0.7 1.0 (1.9) 8.5 n.a. (1.2) 5.3 n.a. n.a. n.a.

9,489 2,510 10,000 420 125 120 364 149 779

5.9 SGD

1.90

1,725 Dec-11

(18.9)

10.6

15.7

(0.2)

147

8.8

2.7

2.2

35.0 10.7 9.4 62.0 6.4 6.0 76.0 7.3 6.4 56.0 7.9 6.1 20.0 5.8 5.9 26.7 n.a. n.a. - 3.5 2.8 - 5.5 3.3 - n.a. 13.5 - n.a. n.a. - 8.6 5.4

1.9 1.0 0.8 0.4 0.6 n.a. 0.6 0.5 0.8 n.a. 1.7

1.6 0.9 0.7 0.4 0.5 n.a. 0.5 0.4 0.8 n.a. 1.3

9.0

7.8

1.4

1.2

13.8 15.7

13.7

2.6

2.4

Cash 58.8 9.7 72.0 Cash 0.0 95.9 20.6 3.0 29.2 0.0

8.3 4.8 1.6 3.3 7.7 n.a. n.a. n.a. 2.9 7.7 3.6

16.9

9.2

^ H-share market cap for H-share # FY12: FY13; FY13: FY14


Page 5


But only about fair when compared to other M&A deals. In terms of earnings multiples implied in the list of M&A deals we mentioned earlier, we note most of the deals are done at significantly high PE and EV/EBITDA multiples. This is largely a function of either the timing of the deal, wherein coal prices were expected to increase, going forward, or a function of the maturity stage of the mine, wherein optimum production levels may not have been reached. As such, we think Korea

Electric Power Company’s acquisition of a 20% stake in Indonesian thermal coal miner Bayan Resources in July 2010 to be the most relevant and comparable to the current transaction. At 15.7x earnings and 10.6x EV/EBITDA multiple for the PTT offer, the multiples are quite similar to the 17x earnings and 11x EV/EBITDA multiples that KEPCO offered for its stake in Bayan.

Snapshot of PE and EV/EBITDA multiples implied in recent coal M&As Date Acquirer Announced

Target

Country

Coal Type

Aug-09

Yanzhou

Felix Resources

Australia

Thermal coal

Mar-10

Essar Group

Trinity Coal

USA

Coking & thermal coal

Acquisition Est fwd P/E (x) Est EV/EBITDA Price (US$m) (x) 3000

N/A

N/A

600

N/A

N/A

Jul-10

Banpu

Centennial Coal

Australia

Thermal coal

2500

56

19

Jul-10

Korea Electric Power

Bayan Resources (20% stake)

Indonesia

Thermal coal

2575

17

11

Nov-10

Walter Energy

Western Coal

Canada, USA, UK

Coking coal

3200

84

46

Dec-10

Rio Tinto

Riversdale

Mozambique, South Coking and steam Africa coal

3900

nm

nm

Jan-11

Alpha Natural Resources

Massey Energy

USA


7100

nm

25

May-11

Arch Coal

International Coal Group

USA


3400

113

18

Aug-11

Yancoal

Syntech Resources

Australia

Thermal coal

222

N/A

N/A

Sep-11

Yancoal

Premier Coal

Australia

Thermal coal

300

N/A

N/A

Australia

Oct-11

Peabody

Macarthur Coal

Met coal, PCI

5100

Nov-11

Winsway

Grande Cache Coal Canada

Coking coal

1000

29

13

Dec-11

Yancoal

Gloucester Coal

Australia

Coking coal

2100

nm

53

Aug-12

PTT

Sakari Resources

Indonesia

Thermal coal

1760

16

11

Source: Companies, press reports, Bloomberg, DBS Vickers estimates

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Coal prices have stabilized but any rebound in the near term will be mild at best Coal prices have likely bottomed out in June. The price of thermal coal shipments at the Australian port of Newcastle – the physical benchmark contract for Asia – fell by 29% since the beginning of 2012 to hit a low of US$81/t in July 2012, its lowest level since end 2009. This was due to weaker demand from China and rising supplies of coal into Asia from non-traditional sources such as Colombia and the U.S. Since then, prices have stabilized, as expected, and are now hovering in the US$85-90 range.

Qinhuangdao port has fallen to 6.6m tons as of Aug 21, down 30%-plus from this year’s high of 9.5m tons. Demand from downstream power plants is also improving, as rising consumption has reduced their inventories to levels of some 21 days of coverage. But further coal price appreciation will depend on recovery in China in 2H12. The Chinese government’s recent efforts to bolster growth include cuts in interest rates and bank reserve requirement, faster approvals for investment projects, and incentives program to boosts sales of home appliances. These measures should allay fears of a China hard landing and accelerate GDP growth in 2H12 to some extent.

Coal price trends New c ast le Coal Pric e F OB (US$/ t on) 140 130 120 110 100 90 Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Apr-10

Jan-10

80


High inventories at China’s IPPs and QHD port were key to the problem. Coal stockpile at China’s largest Qinhuangdao port reached a record high of 9.5m tons in June vs. maximum capacity of 10.5m tons. Power plants in China also held record-high coal inventories (28-day coverage level vs. 18-day level in January 2012) due to weaker electricity demand amid a staggering domestic economy. But price at US$80/ ton is near production cost for some miners. We believe rising production costs, high strip ratios, depleting reserves, and potentially higher taxes will provide downside support to benchmark coal price at US$80/t levels. Recent data indicate that cash cost for US coal miners is close to US$80/t and Indonesian coal miners US$60/t for 6,700kcal coal. Below US$80/ ton, supply could drop as miners lack incentive to continue to produce at depressed prices. Hence, situation is stabilizing now. China’s thermal coal market has shown signs of stabilizing, as the oversupply pressure is easing following production cuts in main producing provinces and a rise in consumption of power plants during high summer demand. Inventory at the

Recovery will be mild at best. According to DBS economists, the manufacturing PMI for China for July fell further to 50.1 from 50.2 in June and 51.3 in 2Q12, signaling continued weakness in both external and domestic demand. Although headline FAI growth has continuously decelerated in the past three months from 20.9% (YTD) in March to 20.1% in May, it rebounded notably by 20.4% in June. With more new project approvals, FAI growth is set to accelerate to 20.6% in July, on the back of active fiscal policies targeted at certain industries, particularly energy efficiency, environmental protection and primary infrastructure in rural areas. Bottomline is the economy will rebound mildly in 2H12 driven once again by investment spending. Other growth components, however, will likely remain muted. Thus, there may be a degree of tactical rebound but coal prices will not jump back up sharply. We recently cut our benchmark coal price assumptions for FY12/13, to factor in lower–than-expected demand and the surge in supply. We expect coal prices to improve from current levels of US$88/ton currently to around US$95/for by end-2012, in line with gradually improving demand and some cuts in supply. We expect average benchmark coal price in 2013 of around US$100-102/ ton, much lower than the US$120/ton levels seen in 2011, owing to the weaker supply-demand dynamics. Key concern is the uncertain macro outlook. Although we expect coal demand and prices to recover somewhat in 2H12 following a better economic outlook for China, there are still lingering uncertainties stemming from the unresolved Eurozone crisis that might continue to drag on China’s growth. China’s policy stimulus is a wild card, but DBS strategist opines that any measures will be piecemeal and insufficient to lift growth significantly. A stronger USD is also a negative driver for commodity prices.

Page 7


Longer-term outlook for coal is still sanguine but rising LNG use could be a threat worth considering Coal is still the cheaper fuel source in Asia. Coal provides 29.6% of global primary energy needs and generates 42% of the world's electricity. Recent increases in gas supply from shale gas developments in the US provide an alternative fuel for power generation due to its cleaner environmental impact. Nevertheless, we expect fuel mix for power generation in China, India and other developing countries to continue to focus on coal due to its availability and low cost. New coal-fired power generation capacity in Asia and transportation bottlenecks will support coal prices. Coal demand is expected to grow at 6-8% p.a. over the next few years, supported by still tight coal supply resulting from a mining sector consolidation and railway transportation bottlenecks in China, as well as planned expansion of coalfired plant capacities in Asia. India plans to increase power generation capacity by 113GW by 2017, and Indonesia by 20GW by 2015/16. And gas prices in Asia are currently linked to oil prices, which makes unit generation cost from gas-fired power plant much higher than coal-fired plants, estimated at 30% higher based on current prices. But there may be longer-term concerns as and when gas prices start to decline sharply due to a surge in supply from North America, and Asian countries move to buying gas based on Henry Hub prices rather than the contractual prices prevalent now. Nevertheless, it is still too early to assume anything as US has yet to build up its liquefaction facilities for gas exports, and Asia still has inadequate re-gasification capacity to import LNG in a big way. Asian gas contract prices, gas processing charges and freight rates would be the key items to compare generation cost between coal and gas over the longer term.

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Final decision depends on view of coal prices Offer looks good enough for investors with shorter investment horizon. Overall we believe the deal, priced about 30% higher than 1-mont VWAP, is generally a good exit option for minority shareholders, especially given the relative gloom in current coal prices and the regulatory risks in Indonesia, which may limit catalysts in near term, as Sakari’s earnings potential will continue to be weak. Caveat emptor for long-term coal price bulls. Our existing TP for Sakari of S$1.40 was based on –1S.D. valuation metrics (blended 10x PE, 2.5x P/BV multiples), but is also supported by our DCF valuation (7.5% WACC) where we assume a long term coal price of US$100/ ton. If, however, investors are much more bullish about future coal prices, they might want to hold on the stock for further appreciation potential, rather than tendering their shares to PTT at the offer price of S$1.90. We reckon the offer price implies a long-term coal price assumption of about US$110/ton. The table below summarises variation in our DCF valuation with changes in long-term coal price assumption. Owing to the high cost structure at Jembayan mine, Sakari’s earnings and valuation are particularly sensitive to coal price assumptions. Coal price trends Benchmark coal price (US$/ton)

90

100

105

110

120

DCF Valuation (S$ per share)

0.80

1.40

1.65

1.90

2.50

Source: DBS Vickers estimates

The Board of Directors of Sakari, will, in due course, appoint an independent financial adviser in connection with the offer. A circular containing the advice of the independent financial adviser and the recommendation of the directors of Sakari who are considered independent for the purposes of the offer will be sent to shareholders within 14 days from the date of dispatch of the offer document, which is to be issued by PTT within the next 21 days.

Company Focus Sakari Resources Ltd Sensitivity Analysis

Key Assumptions FY Dec

2009A

2010A

2011A

2012F

2013F

82.1 9.2 47.5

72.7 10.6 47.0

93.2 10.6 59.1

86.9 11.1 59.7

82.5 13.2 58.0

FY Dec

2009A

2010A

2011A

2012F

2013F

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

748 (448) 300 (58) 243 (1) 0 (23) 0 219 (85) 0 0 134 134 242

737 (556) 181 (37) 144 (5) 0 (14) 0 126 (37) 0 0 88 88 139

1,014 (697) 317 (57) 260 13 0 (13) 0 259 (69) 0 0 190 190 273

885 (663) 222 (35) 186 (5) 0 (12) 0 170 (60) 0 0 109 109 182

997 (765) 232 (40) 192 (5) 0 (8) 0 179 (54) 0 0 126 126 188

27.9 23.4 28.0 7.3

(1.6) (42.4) (40.5) (33.9)

37.6 95.8 79.8 115.7

(12.7) (33.3) (28.2) (42.5)

12.7 3.1 3.1 14.7

40.1 32.4 17.8 31.5 14.4 18.9 60.7 10.6

24.6 19.6 12.0 17.7 8.5 11.5 49.4 10.6

31.3 25.6 18.8 33.0 16.7 19.6 60.0 19.4

25.1 21.1 12.4 16.8 9.2 11.9 60.0 15.3

23.3 19.3 12.6 17.9 10.4 13.4 60.0 23.5

Coal ASP (US$/ton) Sales Volume (m tons) Cash Cost (US$/ton)

Income Statement (US$ m)

2012

Coal Price +/- 1% Volume +/- 1%

Net Profit +/- 3% Net Profit +/- 1%

Margins Trend

31.0% 26.0% 21.0% 16.0% 11.0% 2009A

2010A

Operating Margin %

2011A

2012F

2013F

Net Income Margin %


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Company Focus Sakari Resources Ltd Quarterly / Interim Income Statement (US$ m)

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)


Page 10

Revenue Trend

238 (183) 55 (13) 42 8 0 (3) 0 47 (23) 0 24 24 50

5.7 (8.5) (6.7) (5.9)

(1.4) (5.0) (2.0) (5.0)

57.7 85.9 59.4 97.3

(46.3) (78.2) (71.8) (80.2)

26.1 129.6 68.9 65.5

30.2 24.9 17.2

30.5 24.8 16.6

30.7 25.0 20.8

20.2 13.1 7.7

23.1 17.6 10.1

40%

250 20% 200 0% 150 -20%

100 50

-40%

0

-60%

Revenue

Revenue Growth % (QoQ)

2Q2012

189 (151) 38 (13) 25 (3) 0 (3) 0 19 (4) 0 14 14 22

4Q2011

351 (243) 108 (20) 88 12 0 (4) 0 97 (24) 0 73 73 100

60%

300

1Q2012

223 (155) 68 (13) 55 (1) 0 (3) 0 51 (14) 0 37 37 54

80%

350

3Q2011

226 (158) 68 (12) 56 0 0 (3) 0 53 (14) 0 39 39 57

400

2Q2011

2Q2012

1Q2011

1Q2012

4Q2010

4Q2011

3Q2010

3Q2011

2Q2010

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

2Q2011

1Q2010

FY Dec


Balance Sheet (US$ m) FY Dec

Asset Breakdown (2011) 2009A

2010A

2011A

2012F

2013F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

702 0 88 57 32 98 10 987

735 0 104 82 21 113 42 1,098

770 0 100 155 18 100 44 1,187

819 0 96 89 33 122 44 1,203

865 0 91 32 33 140 44 1,206

ST Debt Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

207 156 0 152 472 0 987

0 168 313 93 524 0 1,098

0 179 284 94 631 0 1,187

0 186 244 99 675 0 1,203

0 214 164 103 725 0 1,206

(16) (150) 38.8 86.4 15.3 0.8 0.5 0.4 0.3 0.3 72.7 NA

9 (231) 52.4 94.1 17.4 0.7 1.5 1.2 0.4 0.4 36.1 4.8

(16) (129) 38.5 82.6 10.4 0.9 1.8 1.4 0.2 0.0 29.6 3.9

14 (155) 45.9 93.9 14.2 0.7 1.6 1.1 0.2 0.2 41.0 3.2

3 (132) 48.1 95.4 15.9 0.8 1.2 0.8 0.2 0.2 61.1 3.4

FY Dec

2009A

2010A

2011A

2012F

2013F

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (US cts.) Free CFPS (US cts.)

219 13 (85) 0 (45) 79 181 (150) 0 0 0 (4) (154) (81) (111) 26 1 (165) 0 (139) 20.0 2.7

126 11 (37) 0 47 (71) 75 (113) 0 0 0 (2) (115) (44) 107 2 24 89 0 49 2.5 (3.4)

259 47 (69) 0 11 18 267 (84) 0 0 0 1 (83) (80) (30) 1 0 (110) 0 74 22.6 16.2

170 55 (60) 0 (7) 0 158 (100) 0 0 0 0 (100) (66) (40) 0 (19) (124) 0 (67) 14.5 5.1

179 59 (54) 0 10 0 194 (100) 0 0 0 0 (100) (75) (80) 0 5 (150) 0 (56) 16.2 8.3

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Inventory - Debtors 1.8% 9.6%

Bank, Cash and Liquid Assets 14.9% Net Fixed Assets 73.8%

Capital Expenditure

Cash Flow Statement (US$ m)

160 140 120 100 80 60 40 20 0 2009A

2010A

2011A

2012F

2013F

Capital Expenditure (-)


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DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

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such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 30 Aug 2012, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).

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COMPANY-SPECIFIC / REGULATORY DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as 1. of 28-Aug-2012 PT. DBS Vickers Securities Indonesia ("DBSVI") has a proprietary position in Bumi Resources , Indo Tambangraya, Adaro Energy recommended in this report as of 29 Aug 2012. 2.

DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered brokerdealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of 30 Aug 2012.

3.

Compensation for investment banking services: i.

DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the company mentioned.

ii.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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