Banpu

Price Target : Bt700.00

·      3Q11 earnings estimated at Bt3.7bn, 5% below consensus

·      Has acquired 80% of HUNNU shares

·      Maintain HOLD and Bt700/sh TP; expect HUNNU to contribute losses over the next 3 years

Preview 3Q11 result. BANPU is expected to report Bt3.7bn earnings for 3Q11 (EPS: Bt13.6), up 17% QoQ (+64% QoQ excluding FX gain in 2Q11). Key drivers are (i) higher sales volume of 6.8m tons (5.3m in 2Q) and selling price of US$98/ton (US$96.5 in 2Q) for Indonesian coal, (ii) higher sales volume of 4m tons (3.7m in 2Q) and selling price of US$73 (US$67 in 2Q) for Australian coal, (iii) Bt200m earnings contribution from Chinese mines, and (iv) lower diesel cost. Gross margins for coal should improve to 45% from 41% in 2Q. BANPU has contracted 17% of its Indonesian coal sales next year at average US$94. 3Q11 result will be released on 10 Nov.

Acquires 80% of Hunnu shares. BANPU made an offer for the remaining 88% stake in HUNNU at A$1.80/sh, to raise its stake to 100% (HUNNU owns 11 coal mines in Mongolia). BANPU has so far acquired 80% of HUNNU. The acquisition would cost US$425m, and if successful, would raise BANPU’s debt/equity to 0.9x from 0.7x now. Deal should be completed by next week. BANPU is targeting for HUNNU to produce 3-5m tons by 2015.

Maintain HOLD, TP Bt700/sh. We fine-tuned our assumptions for CEY (see p.2), which led to 3% increase in this year’s earnings and 6% next. We are retaining our HOLD rating in the absence of near-term catalysts and rising macro risks. HUNNU will likely post operating losses over the next 3 years.