Banpu

Banpu Plc 
 

Investment thesis: We attended BANPU’s analyst meeting last Friday. We feel that its post-earnings release share price retreat was an over-reaction. The Chinese coal operation won’t be any worse than the market anticipates and the impact of high diesel prices will be much milder than before. As such, the price weakness offers a buying opportunity. Profit growth momentum in 1Q12 and forecast firm coal prices will build sentiment toward BANPU.
Forecasts cut on more conservative assumptions: We have trimmed our EPS forecasts by 5% to Bt54.2 for FY12 and another 4% to Bt64.7 for FY13 to factor in sustained high oil prices and an extra safety fund for coal assets in China. But in our view, rising diesel costs will have only a limited impact on BANPU’s earnings, particularly ITMG. Based on management guidance, production costs for the Hebi and Gaohe Mines will rise to RMB550/t each from RMB450/t and RMB470/t, respectively, because the Chinese govt started requiring local operators to set aside a bigger safety fund late last year.    
Only limited impact from oil price spike … BANPU has obliged diesel hedging contracts for 63% of its total usage at a mean price of US$1/liter (the 2011 level). The forecast higher ASP for FY12 (we expect $105/t versus $97/t posted for FY11) will offset this effect. That said, were the current oil price to be sustained through the year, it would increase ITMG’s production costs by a modest Bt700m this year and squeeze its GM by 1%. We now expect ITMG’s GM at 49% for FY12, still within BANPU’s target range of 48-50%. Note that the diesel price hike won’t affect CEY’s operation, as it mostly uses electricity to power its equipment. 
…China coal performance will normalize … Management said the poor 4Q11 Chinese coal operational performance was due to recognition of deferred expenses and a govt-required safety fund of RMB45/t, which pushed up production costs by US$20/t. The Goahe Mine was also asked for a price discount, which squeezed its ASP to RMB627/t from 3Q11’s RMB742/t—these twin effects impacted the China coal performance by US$20m. Yet, most of the extra costs won’t recur in 1Q12 (except the safety fund). On a positive note, the firm successfully negotiated with local power operators to raise the Hebi Mine’s ASP to above RMB600/t from RMB480/t in 4Q11.
…so profit growth will be sustained into 1Q12: We are now more positive on BANPU’s profit growth profile for 1Q12 than before. ITMG’s output will decline to 5.9mt in 1Q12 (900KT short of its 4Q11 number), but CEY’s output will ramp up to 3.9mt from 3.7mt in 4Q11 (due to fewer long-wall moves) and BLCP has resumed normal operations. Our concerns about higher diesel costs have ebbed—most of the firm’s diesel usage has been hedged. Extra costs (an extra demurrage charge, bonuses and deferred expenses at the Chinese coal operation) won’t recur in 1Q12.