Straits Asia: Stick to fundamental BUY

The long awaited speculation of Straits Asia Resources (SAR) share divestment by its parent has finally concluded but falls below market expectation. Straits Resources (SRL) has agreed to sell 60% of its stake in Straits Bulk (SBI) (which owned 47.1% stake in SAR) to PTT Int’l Coy Ltd (PTT) for US$335mn. Furthermore, PTT will tender the remaining outstanding SAR share for S$0.807/share. Despite lower than expected offer price, we still view that SAR’s fundamental remains firm. As such, we maintain our TP of S$1 and recommend shareholders not to accept the tender offer.

Structure changes. After the acquisition, PTT and SRL will have a 60% and 40% stake in SBI respectively, thus engages in a so-called co-investment. Other than SAR, SBI also owns coal assets in Brunei and Madagascar. Based on the initial agreement, most of the management in SBI will be retained although PTT will put several representatives in both SBI and SAR. Thus, there might be some changes in SAR’s management, but are unlikely to be drastic, in our view.

Operations remain firm. Aside from the structural changes, operational wise, we believe SAR is still on solid ground. The company is eyeing a production volume of 9-10mn tons for FY09 and will expand its total capacity to 19mn tons p.a. Exploration is still ongoing to further strengthen its coal reserves and resources, which currently stands at 112mn tons and 638mn tons respectively.

Remains a BUY. We retained our forecasts for SAR as we view that changes in parent-level structure will not impact the operational activity. We maintain our target price of S$1.00 and recommend shareholders not to accept the tender offer, as the offer price is too low while the outlook for the company remains firm.

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