Record earnings in FY08. Straits Asia Resources Ltd's (SAR) FY08 results were ahead of the street's as well as our expectations. Revenue accelerated by 133.2% to US$585.2m on strong coal prices and higher production volumes, leading to a 335.6% surge in net profit to US$124.4m. Average selling price (ASP) of thermal coal rose 66% to US$70/ton in FY08 on robust demand for energy, while production volume more than doubled to 8.6Mt from 3.5Mt, thanks partly to contributions from Jembayan mine which was acquired in Dec 07. In terms of its interim performance, 4Q08 revenue grew 147.2% YoY to US$151.8m, while net profit for the quarter soared 316.4% YoY to US$39.7m. A final dividend of 2.18 US cents has been declared, bringing total dividends for the year to 6.83 US cents (yield: 12%), in line with the group's 60% dividend payout policy.

Profit margins are looking good. Gross profit margin for FY08 ballooned by 16.6ppt to 39.4% on sky-high coal prices, while net profit margin expanded by 9.9ppt to 21.3%. We are anticipating further improvements in profit margins in FY09 as SAR has contracted higher coal prices for its output this year. 73% of its FY09 output has been priced at US$114/ton, representing a 63% surge from the US$70/ton ASP achieved in FY08. Nevertheless, we have conservatively assumed a lower blended ASP for FY09, implying an additional 10.8ppt improvement in gross profit margin to 50.2%.

Vast improvement in cash flows. Operating cash flow improved to US$191.5m from US$33.0m a year ago thanks to strong coal prices and higher output. This led to a significant improvement in net cash flow to US$141.4m vs. US$6.8m a year ago. We believe that SAR will continue to deliver strong operating cash flows in FY09 given its strong order book, and this will support its ability to repay borrowings and sustain dividend payouts. Nevertheless, we have assumed a more conservative dividend payout ratio of 40% to allow for cash conservation in the event of a protracted credit crunch.

Still deserves a BUY. Management did not have any updates on its parent company's divestment exercise, except that talks were still in progress. We have raised our WACC assumptions to take into account higher borrowing costs and have eased our thermal coal price assumptions beyond FY10 in view of the weaker demand for energy. As a result, our DCF-based fair value estimate eases to S$1.15 (from S$1.35). We maintain our BUY rating on the stock.