Finding SCC’s market price

MANILA, Philippines—Semirara Mining Corp. (SCC) is obviously among those listed issues whose share prices had literally traded across the price range of the trading board since it was listed—an exceptional market performance that makes SCC an attractive “Buy” for many till today.

In 2002, SCC was recorded to have traded at P0.40 a share only on small volume. It gradually traded actively as it turned to equity funding to finance its fast-growing operations.

Between 2008 and 2010, SCC shares hit a low of P29.50 and a high of P193. By March 22, 2011, it reached a high of P244 a share.

As of the end of trading last week, it closed at P222.80 on the back of a company disclosure made last April 7 that SCC was declaring a cash dividend equivalent to P10 a share for stockholders of record as of May 27, 2011, payable on June 22, 2011.

By the way, the “ex-date” of the cash dividend is today, May 24, which would mean that it is too late for you to buy SCC shares to be entitled to the P10 cash dividend.

Background

SCC obtained from the government the operating contract to explore, develop and mine the coal resources on Semirara Island in Caluya, Antique.

It has been producing a sub-bituminous coal that is appropriate for use in a wide range of combustion facilities and is paying the government an annual royalty equivalent to 30 percent of gross revenues less allowable expenses or a minimum of 3 percent of gross revenue.

On the basis of a study in 2004 by third-party Minarco Asia Pacific Pty Ltd., the Panian mine was estimated to have a recoverable coal reserves equivalent to 52.1 million tons, which was said to be “enough to support the company’s target coal production rates for at least 10 years.”

Based on further studies conducted in 2006, the Panian mine may have longer economic life as about 62 million metric tons of coal were classified as “measured and confirmed,” and about 24.5 million and 6 million metric tons were additionally categorized as “indicated and inferred,” respectively.

In February 2005, new additional shares of 46.9 million shares of SCC were issued in an international public offering “to fully pay its restructured local and foreign debts, update trade accounts and royalties to the DoE, [and] pay the required down payments for new mining equipment programmed for its modernization and expansion to augment production capacity.”

In the same public offering, DMC Holdings Inc. (DMC) sold approximately 58.2 million shares that brought down its shareholdings to 60 percent from 94.51 percent.

In June 2010, by way of stock rights offering, SCC offered for subscription some 59.4 million shares to eligible existing stockholders at the ratio of one for every five (1:5) shares owned as of the record date of July 1, 2010, to raise further funds to pursue corporate expansion plans.

Financial performance

Owing to improved coal production and full-year operation of its power business in 2010, the net income of SCC jumped to P3.95 billion on consolidated sales or revenues amounting to P22.9 billion, broken down into P14.24 billion from coal sales and P8.66 billion from energy revenues.

This was equivalent to a 114-percent increase in the company’s net income for 2009 amounting to P1.85 billion from consolidated revenues of P11.94 billion.

The increase in net income was also boosted by the significant improvement in realized gross profit to 30.54 percent from 21.78 percent of consolidated sales.

This, in turn, resulted in a change in the ratio of net income to sales to 17.3 percent in 2010 from 15.5 percent in 2009, for an improvement of 11.6 percent.

Bottom-line spin

With its successful diversification into the energy sector, SCC has weaned itself from its precarious business model of depending on a single customer.

In the process, it has made the energy sector its next source of major growth. This will come from the planned construction of a 600-megawatt power plant in Batangas in addition to the rehabilitation of the Calaca coal-fired power plant by the first quarter of next year which is projected to increase operating capacity by 30 percent this year and 90 percent next year. (In 2009, the plant generated 1.6 billion kilowatt-hours.)

Along with the improvement of its excavating capacity for its mining business (from 60.3 million bank cubic meters, or bcm, in 2009 to 70 million bcm), estimated consolidated net earnings for 2011 will grow to P5.34 billion or P16.58 earnings per share (EPS). This will increase to about P7.1 billion in 2012 or P19.89 EPS.

Is it worth, then, picking up SCC at the current market price of P222.80 a share?

As is often said, “Finding a great company is only half of the investment process—the other half is assessing how much a company is worth.” A stock’s price must have a good “margin of safety” as Ben Graham adds. (He conceived of the margin of safety in picking stocks and assessing the worth of a company.) This is because, according to him, “if the price you pay for a stock is too high, your investment returns will likely be disappointing.”

The estimated net earnings of SCC for 2011 amounts about 13.44 times P/E at the current market price of P222.80 a share, which in turn is just about equal to the prevailing average P/E ratio of the market.

But on the basis of its estimated net earnings of P19.89 a share for 2012, this will come to about 11.20 times P/E—a price with a margin of safety of 20 percent, which is just about the margin of safety recommended by most seasoned investors following Ben Graham’s concept.

You may reach the Market Rider at [email protected] or directly at www.kapitaltek.com.