Geo Energy Resources Addendum – Valuation & Earnings Projections

229) Geo Energy Resources.png

My investing thesis didn’t explain my valuation methodology and any “target price”. This is deliberate as…… well I am lazy to type out all these figures. It’s easy to do it on a piece of paper but hard to explain in writing unless I draw up tables, and well, that’s such a chore.

But since a sharp eyed reader (NeVeRAgAin) brought this up in the comments section, I feel compelled to explain my thoughts.

Firstly, the only thing of significance with regard to the balance sheet, is the amount of debt and the cost of the debt. I have mentioned earlier that I don’t understand why NRA Capital attached a 2.2x P/B value to it.

The balance sheet is significant only for the debt it carries, in this instance. I’ve already explained in Part I, how the cashflow derived should cover it’s debt for 2017. So Geo Energy shouldn’t have issues operating through 2017.

How about the valuation? Let’s look at some earnings data:

In 1Q2016, Geo Energy delivered 484,836 tonnes of coal, with a gross profit (GP) of $247,659 (I know it says a loss in Q1 financials, but this is restated in Q2 financials and I thought the latest one would be more accurate)

In 2Q2016, Geo Energy delivered 849,844 tonnes of coal, with a gross profit (GP) of $1,235,767.

This means that the GP works out to be $0.51/tonne in Q1 and $1.45/tonne in Q2.

Q1 average selling price was about $26.66, in Q2, it was $27.96

This means that when the selling price increased by $1.30/tonne, the GP increased by $0.94/tonne.

Bear in mind that we’re talking about GP here, so we are not even considering the volatility and effects of operational costs yet.

Well, Aug 2016 selling price was $30.71, Sept 2016 it’s $36.27. Let’s very conservatively assume the ave selling price for 2H works out to be $31.86. This is very conservative with a large MOS as the price to date, is still rising. For it to be an average of $31.86, coal prices must really tank far BELOW $31.86 for Nov and Dec to average out to $31.86.

If we extrapolate these figures, we get a GP of $4.27/tonne, based on $31.86.

253) Geo Energy valuation methodology.png

If the minimum of 4mil tonnes is taken up, we get a GP of $17.08mil for 2H.

That gives us a full year GP of ($17.08mil + $1.48mil) = $18.56mil

Let’s look at each item in the income statement:

Other Income:

254) Geo Energy Other Income.jpg

Based on 1H2016, other income is already $6.35mil. This includes the $3.7mil gain from disposal of All Win. Using the 2015 figures, I assume the other income item as $7.2mil.

General and administrative expenses:

Management has guided that this will be lower. They have reduced it from $8.4mil in 2014 to $6.9mil in 2015.

Let’s assume the expenses remain constant at around $7mil.

Other Expenses:

255) Geo Energy other expenses.jpg

Other expenses were exceptionally high in 2015 mainly due to doubtful debt and impairment losses.

It’s hard to predict accurately, but I’ve taken a figure of $4mil for 2016. I think this is very conservative as there is unlikely to be significant doubtful debts in 2016.

As of 1H2016, other expenses is only $0.3mil.

Finance costs:

This is not too difficult to estimate. I’m estimating it at $7.2mil for the FY. This comprises mostly of the MTNs debt.

Alright, so taking all those figures, we get a PBT of $7.56mil.

Extrapolating the tax payable from 1H2016 into the Full Year, I derive a EPS of US 0.56 cents. (I included the 117mil shares to be issued for payment for TBR)

Coincidentally, my derived EPS is actually quite close to NRA capital’s forecasted figures, although I am pretty sure they derived it differently. (They didn’t break it down and explain how they came to this forecast)

256) NRA capital geo energy EPS forecast.jpg

If we use a share price of $0.188, the PER would then be 24.5

Now, you must be thinking that PER 24.5 is not exactly cheap, where’s the MOS? Where’s the room for further gains?

But let’s bear in mind that Geo Energy’s turnaround only really begins in the 2H2016.

Using the template above, simply work out the figures again to predict 2017 figures.

Assume an average selling price of $37, and tonnage of 6mil if you want to be conservative like me. If you trust management, their guidance is for 10mil tonnes.

I won’t do the math here cos it’ll be incredibly boring for disinterested readers, but it’s clear to see that if you do the math, suddenly it seems a lot more attractive.

I’d also prefer not to reveal my own personal intrinsic prices and target prices, but it’s safe to say that unless something dramatic happens, based on my current knowledge of the company, I think the share price should be significantly above $0.2 before I consider an exit.

Finally, just to add that IMO, although fundamental analysis is important all the time, in this one instance, the numerous myriad number of potential catalysts is probably just as significant. In fact, I think in the short to mid term, it’ll be one of these catalysts that support the share price.

For eg. if the company announces an offtake agreement for TBR as well, at terms similar to the earlier offtake agreement, the share price will react strongly as the earnings predictability is suddenly much clearer.

For those who find all this very confusing, to put it very simply:

Every US$1 per tonne increase in selling price for Geo’s coal will translate into an increase of US$6 million in Geo’s net profit a year (assuming it produces 6 million tonnes of coal a year). 

I read that statement in a report somewhere. This is a lazy man’s way of tracking Geo’s fortunes. (I don’t recommend it, just saying)

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One comment

  1. Wow! Thanks for replying me with such a detailed respond. I am very impressed with the level of detail that you have put into analysing this company. Have been learning a lot since I began reading your blog.

    Hope to see more great work put up by you soon!

    Like

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