SubZero Group Limited ("SZG")

[steve fleming]

Similar to HDX, SZG is involved in coal mining services, an area the market thinks is on its last legs, if not dead already.

However, if you have the capacity to dig a bit deeper rather than accept broad generalisations, then this is potentially not the case.

From the latest financial report:

"SZG is focused on providing critical tasks and services, which involve preventative, regular and planned maintenance activities. The majority of these services are non-discretionary in nature and critical to clients in maximising production and minimising downtime. This approach delivers low execution risk and provides certainty over revenue.

Even as mining capital investment slows, production levels continue to rise and SZG is strongly positioned to take advantage of the emerging maintenance boom as the market leader due to its long-term investment in both infrastructure and personnel.

SZG expects expansion into Queensland and Western Australia to have a positive impact on its FY14 and FY15 earnings.

Since listing, SZG has been awarded a number of contracts that secure an estimated $130 million in additional revenue over the next 3 years. The majority of these contracts have an option to extend for a further 2 years and secure SZG a strong base workload in the coming years. In response to this increase in workload, SZG has increased its maintenance facility capacity by over 200%. SZG’s total capacity now stands at 17,283 sqm of climate controlled workshop facilities.

We expect to see maintenance services spend in SZG’s areas of expertise to increase in NSW by 36% annually through to FY17. Accordingly, SZG will remain focussed on a growth strategy over the next three years."

So an extraordinary forecast 36% annual sector growth....the complete opposite to what the market thinks

This creates opportunities.

"In providing guidance on SZG’s outlook, Mr Farrell said “production and booking indicators continue to rise strongly and given SZG is strongly positioned to take advantage of the emerging maintenance boom we are expecting revenue for FY14 to be around $123 million and EBITDA to be between $14 million and $18 million. However we are expecting a softer run rate for the first half as the sector transitions from a capital implementation market to capital maintenance programs.

Given recent levels of capital expenditure we are expecting the programmed maintenance market to increase dramatically, and this gives SZG a solid two year see through. Based on the increasing export volumes from the Newcastle export facility SZG is taking a preliminary future view on FY15 and we are looking at revenue of between $150 million and $175 million with EBITDA between $24 million and $28 million. We believe that with our investment in people and facilities we are extremely well positioned for the future.”

with a market cap of about $20m and an EV of about $36m, currently trading on just over 2x FY14 EBITDA (midpoint guidance of $16m) and 1.4x FY15 EBITDA (midpoint guidance of $26m)...if you believe Management that is...

With no listed track record, there is a fair bit of risk, so I am looking to scale up my holdings as I get more confidence that Management can deliver

THanks to JT for the heads up on this one!

[Joshuatree]

Just passing it on Steve. Nice summary, cheers JT

[Corporate]

Very interesting find guys. I will be putting subzero on my watch list.

Not that it is a big deal but their logo is awful! And Their annual accounts aren't very well put together. For example, on the primary statements they talk about a reverse acquisition and then in note 25 they say it isn't a reverse acquisition. It doesn't impact the business obviously but little things like that raise red flags for me.

[steve fleming]

Meanwhile, despite the general perception that coal is a dying commodity, actually “Coal will surpass oil as the key fuel for the global economy by 2020”

http://www.smh.com.au/business/carbon-economy/no-sign-of-king-coals-demise-as-asian-demand-rises-20131015-2vjf0.html


Coal will surpass oil as the key fuel for the global economy by 2020 despite government efforts to reduce carbon emissions, energy consultancy firm Wood Mackenzie said.

Rising demand in China and India will push coal past oil as the two Asian powerhouses will need to rely on the comparatively cheaper fuel to power their economies. Coal demand in the United States, Europe and the rest of Asia will hold steady.

Global coal consumption is expected to rise by 25 per cent by the end of the decade to 4,500 million tonnes of oil equivalent, overtaking oil at 4,400 million tonnes, according to Woodmac in a presentation on Monday at the World Energy Congress.

"China's demand for coal will almost single-handedly propel the growth of coal as the dominant global fuel," said William Durbin, president of global markets at Woodmac. "Unlike alternatives, it is plentiful and affordable."

Advertisement China - already the top consumer - will drive two-thirds of the growth in global coal use this decade. Half of China's power generation capacity to be built between 2012 and 2020 will be coal-fired, said Woodmac.

China has no alternative to coal, with its domestic gas output limited and liquefied natural gas (LNG) imports more costly than coal, Durbin said.

"Renewables cannot provide base load power. This leaves coal as the primary energy source," he said.

Asia to focus on low-cost coal

Power infrastructure provider Alstom estimated that across Asia close to half of the 600 gigawatt of new power generators to be built over the next five years will be coal-fired, Giles Dickson, a vice president at the company said.

"Coal prices are low," he said, adding that coal is about one-third of the price of LNG in Asia and about half of the gas price in Europe.

Abundant supply is also supporting demand for coal. The traded volumes of coal will increase by a further 20 per cent by 2020, Dickson said, including supply of lower grade coal from Indonesia, Australia and South Africa.

"As the lower grade coal comes into the market, further downward pressure on prices will further drive demand," he said.

Excess supply and faltering demand growth have depressed global coal prices this year. European coal futures have tumbled more than 20 per cent, while Australian coal prices have plummeted from the record $130 per tonne hit in 2011 to around $80 per tonne as China's demand grew slower than expected.

"If you take China and India out of the equation, what is more surprising is that under current regulations, coal demand in the rest of the world will remain at current levels," Durbin said.

High fuel import costs and nuclear issues will support coal use throughout Northeast Asia, while in North America coal is still competitive in many locations despite abundant low-cost shale gas.

"The struggling economy and low coal prices has rendered the European Union (EU) Emissions Trading Scheme (ETS) ineffective," Durbin said. "The carbon price will need to reach 40 euros per tonne to encourage fuel switching, which is unlikely before 2020."


In Southeast Asia, coal will be the biggest winner in the region's energy mix. Coal will generate nearly half of Southeast Asia's electricity by 2035, up from less than a third now, the International Energy Agency said in early October.

This will contribute to a doubling of the region's energy-related carbon dioxide emissions to 2.3 gigatonnes by 2035, according to the IEA.

Reuters

[okay]

Interesting article KW, particularly the part about China cranking up nuclear by 2017.

[Joshuatree]

Two opposing views

Cockatoo coal is raising re $400 million to expand its coal mine in queensland suggests the former view is currently the most accurate.

[Bigane]

Looks like you may have found a hidden gem. Will need to do some more research before I decide. It is tightly held with low turnover, so a bit of added risk there. Will add to the watch list and look for more evidence of a coal comeback.

[Joshuatree]

"look for more evidence of a coal comeback" I think you are missing the point entirely as is the herd.If one reads Steves summary its clear that stocks like HDX and SZG are in a sweet spot. The great thing imo is that the mkt(the herd) hasnt realized this yet so the current s/p makes for a great entry..

[Bigane]

Maybe so, depending on your timeframe. I made the mistake of making a contrarian play at Boart Longyear in December thinking the sector couldn't get worse and I got badly burnt. Don't get me wrong, SubZero looks good, but there is a short term opportunity cost of investing in an unproven company in an out of favor sector.
I am currently in Austin Engineering and NRW Holdings in the mining services sector. At the moment, both have single figure P/E's, high dividend yields, good liquidity and a management team with a proven track record.

[Joshuatree]

Hi Bigane ;ANG and NRW two very good stocks , always on my watch list. I agree less risk with those two for sure. Both offered ex opps to get in cheap awhile back. Im prepared to wait patiently for the rerate to come with SZG and HDX and am anticipating greater rewards. Cheers

[Joshuatree]

Mmmmh,Good breakout today up to 13.5c with a big spread to 18c. Don't have detailed mkt depth details unfort.

[Jay]

Tried to get a few at 13c, but last time I looked, last sale at 13.5c as you noted and next sell at 18c ($100K) and then at 25c $(80K)

[Entrep]

Tried to get a few at 13c, but last time I looked, last sale at 13.5c as you noted and next sell at 18c ($100K) and then at 25c $(80K)

Fair few at 12.5c now Jay

[Joshuatree]

1 for 3 cap raising @ 10c. Frank Ohalloran former CEO of QBE joins the board!!!. Retire debt increase working capital etc. Geez alot of cap raisings hitting me and the mkt. Near a top?

[steve fleming]

Yep, a couple of pretty high profile corporate leaders on the board now (Frank O'hallloran and Malcolm Jackman)....should assist in giving SZG some decent credibility and profile

am happy with cap raise, will apply for some additional shares @10c as well..probably better alternative to the convertible note in terms of market perception of debt

Now they just need to show to the market some numbers, to prove they are not all talk

[steve fleming]

Interesting to see that BT (Westpac) put in $1.5m of the $2.4m placement.

Don't often run into BT in the small cap space

[Entrep]

Reminder SPP closes tomorrow

[steve fleming]

Coal set to continue dominance in China with reforms
Monday, December 02, 2013 by Proactive Investors




Reports of the demise of King Coal are exaggerated in China, providing opportunities for Australian coal companies


Australian coal companies are set to be beneficiaries of China government reforms aimed at shutting down larger polluting coal mines as well as larger unprofitable mines.


The government said it will curb “disorderly” coal output growth and encourage high-quality coal imports.


China will tighten approvals of new coal mines and ban imports of low quality coal in order to curb the growth of "disorderly" coal production and promote sustainable development of the coal industry.


New coal mines with annual output of below 300,000 tonnes will no longer gain approval.


The use of low-quality coal is seen as a major reason for air pollution in China's northern regions, including Beijing and neighboring Tianjin.


Last year, China imported 289 million tonnes of coal, of which low-quality coal accounted for more than 25%.


Existing coal mines with an output of less than 90,000 tonnes will be gradually eliminated from the industry, and coal mines that fail to meet safety standards will be shut down.


The reduction of mines with the edict from Beijing would reduce the coal supply which would boost coal prices.


The total number of mines has already been reduced to 14,000 by end of 2012 from 24,800 in 2005.


Recent share price gains by China coal companies listed on the Shanghai Composite Index gives further credence to the growing evidence and wave of consolidation continuing in the China coal sector.


Shenhua, the largest coal producer and Yanzhou Coal have been strong share market performers of late.




China coal consumption forecast to rise


China's coal consumption is forecast to rise by 37.1% by 2020, according to the China National Coal Association in a report.


Now while there have been many who have questioned king coal's future given environment challenges in China, the forecast underlines there are few viable alternatives to provide energy as well as fuel China's economic growth.


Coal consumption in China amounted to 3.52 billion tonnes in 2012, the Coal Association expects this to rise to 4.8 billion tonnes by 2020.


Coal Association vice president Liang Jiakun said that far from being in decline, coal still has a dominant role to play and even has growth potential as coal remains China's major energy source as well as .


Coal currently accounts for more than 60% of the country's primary energy resources.


http://www.proactiveinvestors.com.au/companies/news/50746/coal-set-to-continue-dominance-in-china-with-reforms-50746.html

[Joshuatree]

Shortfall of 47 million shares.:(

[steve fleming]

Shortfall of 47 million shares.:(

Yeah.....not very popular at all....I went for extra, but not not many others were keen...Although to be fair, they did say the major shareholder would not taking up his rights, so that would have resulted in a large part of the shortfall

Hope they have negotiated a watertight underwriting agreement!!

[steve fleming]

Yeah.....not very popular at all....I went for extra, but not not many others were keen...Although to be fair, they did say the major shareholder would not taking up his rights, so that would have resulted in a large part of the shortfall

Hope they have negotiated a watertight underwriting agreement!!

"Each of the Non- Executive Directors (or their associated entities) has agreed to subscribefor their full entitlement under the Entitlement Offer. Scott Farrell, the Managing Director andChief Executive Officer, has elected not to subscribe for his entitlement in order to allowinstitutional investors the opportunity to acquire equity in the Company. "

[Joshuatree]

Great to see a major new contract for SZG today for a thermal coal co in hunter valley."the client is forecast to spend $260 million over the next 3 years.Subzero believes it will participate in excess of 50% of this spend" Commencing early 2014.

[Joshuatree]

FY 14 downgrade from Rev re $123 mill to $90-$105 mill and EBITDA from $14-$18 mill to $10 - $14 mill. The carrot that FY15 rev $150-$175 mill with EBITDA $24-$28 mill hasn't change tho ATP. Shareprice dropped half a cent but now is up half a cent. Mkt cap re $23 million.

[mark100]

Is FY15 pie in the sky? Being a thermal coal exposed mining services business I would say the market thinks it is. If they reach that forecast its a bargain! Think I'll remain a watcher for the time being as they haven't achieved a forecast to date

[steve fleming]

Currently trading on 3x FY14 EBITDA, and 1.5x FY15 EBITDA (midpoint guidance) if you can believe Management

At least this announcement proves they have an operational profitable business model (NPAT still likely to be -ve)

A number of new contracts coming on line in the second half to build profitability, so I'll give Management one last chance to prove they can deliver.

[mark100]

Hadn't looked at these guys for a while but looks like it's all over. They were good at talking up rosy forecasts though. Contractors and debt are a lethal combination