Coal-Related Stocks: Outlook

Until Tuesday, April 26th, 2016, the Jakarta Composite Index (JCI) closed at 4,814, gained 4.8% since the beginning of the year, but the index of the mining sector, including coal mines, rose higher at 20.5%. The cause of these substantial gains is pretty clear: The rebound in oil prices, which two months had been as low as US$ 27, but today the oil traded at US$ 42 per barrel. On the other hand, one of the largest mining service company, United Tractors (UNTR), has released its financial statements for the first quarter 2016, and its profits dropped 55.3% from the same quarter of 2015. While another coal company, Resource Alam Indonesia (KKGI), its net income rose but only because of gain in Rupiah exchange rate, while the revenue is still down.

In addition to mining sector, the sector which also had a better performance than JCI is plantation sector, which rose 6.1%. But unlike the coal company, plantation companies seems to have better fundamentals, where the net income of Astra Agro Lestari (AALI) rose 167.5%, although it should be noted that the revenue is still down. Well, we know that these two sectors, namely mining and plantations, had been a favorite of investors in the past, ie when the prices of coal of crude palm oil (CPO) were on its peak, before the downtrend in commodity prices since 2012 has dragged down the commodity stocks into crevasse.

However, after nearly four years, only in the last few weeks that commodity stocks, particularly mining, seems to be promising as some of coal stocks has gained tens or even hundreds of percent. The question is, whether the increase in stock price is in line with the fundamentals of the company?

Unfortunately, the answer is probably not. As already mentioned above, the coal-related stocks could rise higher as oil prices rebound, because of the assumption that if the price of oil rises, the price of coal will also go up. However, based on data from IndexMundi.com, the price of Australian Thermal Coal for delivery in March 2016 was US$ 55.9, or still lower than the same month in the previous year of US$ 64.4 per ton. While based on operational data of UNTR, it is stated that the company's coal sales volume in the first quarter of 2016 increased 2% compared to the same period of previous year, but the revenue still fell 11% due to a decrease in selling prices.

the price of coal in the last one year. Source: Indexmundi.com

But if it is said that the price of coal has reached its lowest point, then it may be true. In last January, the price of coal was US$ 53.4, before then edged to the current position of US$ 55.9 per ton. While if we take the opinion from the management of UNTR, they said that the price of coal will be in the range of US$ 52 – 72 per tonne in the next five years starting from 2016. The point is, although the price of coal is less likely will return to a level of US$ 120 per ton as it did in 2011, but it would not go down further. In the end, the coal is still needed for power plants throughout the world, and a decreasing price over the last few years is only because of decreasing demand from China, causing an oversupply. But if later these supply and demand eventually met, and indeed the meeting point is probably at the price level of US$ 50’s per ton, then that’s wheere the coal prices won’t go down further. Then later, slowly but surely it will rise back.

However, since the price of coal has not had go up (only didn’t going down further), and the financial performance of most coal companies for early 2016 is also not good enough, then like it or not, the coal-related stocks are still not eligible to invest, at least for now. Only indeed, if you look at the valuations in mining sectors, all of them are currently traded at an unbelievably undervalued price, so the opportunity is still there, we only have to wait until the time is right.

And what about the stock of CPO companies?

Unlike the coal price which is still not rise yet, the price of CPO on the Bursa Malaysia was RM2,662, up significantly compared to last year at the level of RM1,900 - 2,000 per ton. But unfortunately, the performance of plantation companies in first quarter 2016 do not show any improvements. However, if the CPO price could at least stay in its current position, then for the year 2016 as a whole, the plantation companies should be able to post an increased net income, hopefully.

In conclusion, I can say that, about these commodity-related stocks, if based on the rule of value investing, then we should take a look for any opportunity but do not rush to go in. In terms of valuation, stocks in these sectors are insanely undervalue, but we still need to wait for confirmation of the financial performance of each company, just to make-sure. If later the coal and CPO companies successfully posted an ROE of say 20%, then the stocks will be easy to fly, even though they have gone up a lot earlier. If you think that a 100 – 200% gain from some of coal-related stocks in recent weeks are overwhelming, then do not forget that in 2011, the stock of Garda Tujuh Buana (GTBO) had increased from Rp100 to briefly topped Rp6,000 per share, or increased sixty-fold, in just one and a half years!

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