Losing coalness?

After posting Resilience this past week, SCC, which I said has the most gorgeous chart, took the opposite price movement.The selldown was apparently driven by the Deutsche Bank analysis of the said issue. The analysis downgraded SCC from a BUY to a HOLD with a target price of 205. At the same time, CitisecOnline upgraded SCC's rating to a 295 fair value. With a little digging, I also found this research from another broker, DA Market Securities on SCC. In this paper, SCC is also upgraded to a 270-fair value.

After a little reading from DA's and COL's research, the upgrades seem valid. Deutsche's research seems contradicting all the other sentiment. So where do we draw the line?

After a few digging again, I finally found a snippet of the Deutsche report (note, however, that I could not verify if this report is valid though :P).

Deutsche Bank - Equity Research - Asia

Semirara Mining : Fairly valued; downgrading to Hold

Semirara Mining {Ticker: SCC.PS, Closing Price: 233.00 PHP, Target Price: 205.00 PHP, Recommendation: Hold}

Price increase overdone
After seeing Semirara Mining (SCC) rise 372% since Jan 2010 (the PCOMP increased 30% over the same time period), we believe SCC is now fairly valued and are downgrading our rating on the stock to Hold from Buy. Our revised target price of P205/sh (-5%) already prices in current and visible developments. Future positives (power plant expansion) remain uncertain and are unlikely to contribute before 2014, and they are subject to execution risk. Despite the prospect of decent dividends, we see limited upside to current levels.

Reality check
Recent macro and company-specific events prompt us to revisit our outlook on SCC. We assess the adverse effects of (a) rising oil prices on costs, (b) lower power spot prices for FY11, and (c) a delay in the rehab of Unit 1. We believe the market has yet to fully appreciate these issues as well as the scheduled expiry of SCC’s tax holiday by end-2013.

Earnings tweaked; much hinges on contract renegotiations
We adjust our profit forecasts for FY11 and FY12 by +2% and -13%, respectively, in light of the above-mentioned issues. Much of the company's prospects on the electricity side will hinge on the electricity sales contracts negotiations’ outcome (likely by mid-year), which can either be adverse or favorable. However, even a "favorable" outcome (which could involve a JV with Meralco (MER.PS)) is unlikely to provide earnings upside over the next two years.

Lowering our DCF-based target price to P205/sh; risks
We derive our revised target price of P205/sh based on DCF analysis, which uses our regionally-mandated COE of 14% (previously 13.3%). Note that we have yet to factor in the company’s expansion plans. While the stock looks inexpensive at 8x FY12E PER, we believe this level of earnings will be difficult to sustain, given that its tax holiday expires in end-2013. Upside risks include an increase in coal and power prices and a JV with Meralco on an expanded plant. Downside risks include a collapse in coal and power prices....

So there. I'm pretty convinced with COL's insight towards SCC but at the same time we could not just brush off another view of SCC  from one of the biggest foreign player in the country (afterall, most of the massive selling last Wednesday came from this broker).

At this point, I'm rethinking my position in SCC. I still see the lingering potential of a possible upside.Fundamentals are pretty much strong. The world needs energy. That's a current fact. Clean energy is of course challenging coal constantly, but if it's a good alternative, it's not bringing enough power. But the market sees what the market wanted to see. And right now, it's seeing uncertainty. In times like this, fundamentals are on the lowest priority.

It is now down by 13% at it's highest at 244. At 200, it's probably the strongest support. So let's wait and see.