SCC – The Dirty Coal Opportunity

  • Bought 30,058 shares of SCC
  • Opportunities in problem areas
  • TRAIN Law for Coal
  • Mining hit by strict government monitoring

Lets start off this value investing blog with SCC. Semirara Mining is a coal mining company. It also has power plants. The coal from the mines gets used by its power plants, (an advantage) reducing costs. And this is where the first problem began. Semirara’s power plants broke down and was shut down for maintenance. Because of this, Impatient holders of Semirara stock put a selling pressure on its stock price.

Another problem just recently where it took a nose dive because of the Tax changes (TRAIN) wherein they will increase the tax on coal. Semirara has been battered. From a high of P/E ratio of 45 to now P/E of 8.

Another factor to its decline is the strict monitoring of the government against mining companies. It is an industry wide decline that affected all stocks of mining companies.

From a stock price of 50 (adjusted from stock dividends) to now 29.8.

Is it a good stock?

Coal is still the number one fuel source for power plants in the Philippines. Even though, renewables are gaining ground, we do not see this happening in the near future. Coal is still the cheapest and fastest source for us. And with a growing economy, we do not have much funds to build renewable infrastructures. Coal fired plants would still be the go to plants. Unless future proves to be otherwise.

If our dependence on coal persists, what better way to take advantage of that than to invest in the company that has 18% (in 2017) of the market share of coal production in the Philippines? Could they maintain this market share? I believe so.

Currently, with a stock price of 29.8, it has a dividend yield of 8.42%, a P/E Ratio of 8. And an earnings yield of 11%.

Power Plant Problems

In all business, there will be times where machinery will fail. This is no different. This is just temporary and I do not see this being a problem, but instead an opportunity for us to get to know the stock.

Tax Problem

I think this is where most people think SCC is a sell because of the new Tax law. But SCC is exempted from coal tax. Which means, whatever tax law is passed for coal, the one bearing the cost would be the electricity distribution companies and the consumers. SCC is exempted because of a stimulus made by previous administration to stimulate the mining of coal for supporting the energy demand of the Philippines.

If the politicians would amend this law, I think this is when I should be concerned. But for now, I think this is a competitive advantage of SCC. And I still think this is a buy.

Commodity Prices Risk

Of course, price of coal will affect the performance of the company. But looking back at the times where the price of coal was low, the business still did well because the power plants (now consuming less expensive coal price) would increase their profit margin. So it becomes a stable business even with price fluctuations of coal.

Intrinsic Value

Estimated intrinsic value at P39/share. With a stock price hovering at 29, we are looking at 25% discount to intrinsic value. A good enough margin of safety since this is a blue chip company included in the PSEI, and closely followed, this window of opportunity might not last long… I am a buyer.

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