IIFL starts Straits Asia Resources at Buy

Stock Name: StraitsAsia
Company Name: STRAITS ASIA RESOURCES LIMITED
Research House: IIFL

IIFL starts Straits Asia Resources (AJ1.SG) at Buy with a $3.55 target price (54% upside). It says the company is a coal pure-play and is a good proxy to underlying benchmark coal prices: “in-line with rising demand for seaborne coal and strong benchmark coal prices, we expect SAR to deliver 66% earnings CAGR during FY11-FY13,” driven by 16% CAGR in coal production (from 10.5mt in FY10 to 16.5mt in FY13); 8.0% CAGR in average sales price (from US$72.8 ($92.4)/tonne in FY10 to US$94/tonne in FY13); and 700bps expansion in net margin between FY11-FY13 driven by strong cost control. 

It notes the stock currently trades at 6.4X FY11 and 4.2X FY12 EV/EBITDA. The house says its 16% coal production CAGR assumes production at the Northern Leases to start by 3QFY11; “Sebuku will experience economies of scale, due to the ramp up of production at Northern Leases, and Jembayan will benefit from the installation of the new loader in April 2011.” 

Shares are up 0.8% at $2.43.