Banpu

Banpu Plc

Investment thesis: Despite its 8% QTD share price increase, we believe BANPU’s outperformance will continue. Solid 1Q12 earnings momentum and anticipation of a firm thermal coal price will build sentiment toward the stock. Valuation-wise, it trades at an implied long-term coal price of US$75/t, discounts of 35% to the current spot price and 31% to MS’s base-case long-term price projection of $109/t. Given BANPU’s exceptional FY12 earnings growth profile and the fact that it is the least prone to swings in profitability of the commodity-related stocks we cover, the stock remains one of our two preferred plays within Thai Energy space.
4Q11 preview revisited—extra expenses squeezed bottom-line: We have trimmed our FY11 profit projection by 2% to reflect extra expenses from a tax adjustment and losses on coal swap and diesel hedging contracts during 4Q11. That implies 4Q11 earnings of Bt3,550m—a decline of 16% QoQ and 28% YoY. But core profit should post a rise of 6% QoQ (and 329% YoY) to Bt4,050m, buoyed by an improved ITMG performance.
Stronger numbers for 1Q12: The prospects for 1Q12 are better, due to all-round improvements to both coal and power operations. Although the Indonesian rainy season has started, BANPU guided that production at ITMG mines has so far remained been sustained without major hold-ups at flattish QoQ prices. At the CEY operation in Australia, fewer long-wall relocations at mines will boost production volume for the quarter. The resumption of BLCP will also augment 1Q12 earnings.         
FY12 earnings uptrend intact—changing profitability dynamics at CEY and Goahe: We remain positive about BANPU’s FY12 earnings outlook—core profit expansion of 28% YoY. Growth will be buoyed by volume expansion at ITMG, CEY and Gaohe—we anticipate that the effective sales tonnage will rise 9% YoY to 45mt in FY12. BANPU has obliged 45% of ITMG’s total sales tonnage under firm contracted prices with an ASP of US$103/t versus $97/t for FY11. Apart from ITMG’s good outlook, contributions from Australian and Chinese coal assets will increase this year, more than offsetting the effect of the loss of the Daning Mine (which was divested following an obstacle course of regulatory problems).
Foreign holding has troughed—re-loading would build S-T sentiment: The foreign shareholding in BANPU has dropped to a record low of 45.44% from a peak of 65.74% at YE09—lower than the 47.43% nadir in the wake of the Sept 2008 financial crash. As we anticipate that tight thermal coal markets will sustain prices, the risk of a further sell-down appears limited. On the flipside, past sell-offs have been followed by re-loading. If the pattern holds true this time around, re-loading will bring on share price appreciation.
Outlook
4Q11 preview revisited—extra expenses squeezed bottom-line: We have fine-tuned our profit projection for FY11 and so trimmed our bottom-line forecast by 2% to Bt20,081m in order to factor in extra expenses—particularly a tax adjustment and marked-to-market losses on coal swap and diesel hedging contracts during 4Q11. That implies 4Q11 earnings of Bt3,550m—a decline of 16% QoQ and 28% YoY. Nonetheless, we anticipate that BANPU will post an impressive operational performance—core profit growth of 6% QoQ (and 329% YoY) to Bt4,050m. An improved ITMG performance, driven by higher ASP and sales tonnages, should have outweighed the effect of a decline in output at CEY mines (brought about by long-wall relocations) and the BLCP power plant’s annual maintenance shutdown.