High coal prices fuel SAR's stock advice upgrade

Now is the best time to buy Straits Asia Resources stocks as valuations and a 276% YoY jump in profit make the company look attractive, DMG Research said.

SAR's net profit for 1Q11 jumped to US$42mln due to a combination of higher than expected production from Sebuku, higher than expected ASP, and lower than expected costs.

DMG Research has raised its FY11 and FY12 net profit forecast by 29% and 40%, respectively, on the back of higher coal price assumptions and the issuance of Northern Leases permits expected within a few months.

The two factors also drove the analyst to upgrade its FY11 and FY12 coal price assumptions by 19-24% to US$125/tonne and US$130/tonne respectively, with a long term price assumption of US$90/tonne.

"This comes on the back of strong demand for Indonesian coal, and we align our price assumptions to that of our Indonesian Coal Sector analyst," DMG Research said.

SAR is currently trading at 14.1x FY11 P/E, given its earnings growth of 90% for FY11. The analyst's target price of S$3.08 is based on 16.3x FY11 P/E, a 15% premium to peers.

"We believe this premium is justified given the potential permit issuance acting as a positive catalyst," DMG Research said.