Banpu

Banpu Plc (BANPU)

Investment thesis: While our BUY rating on BANPU stands, we are now less confident that its share price will outperform in 2H12 than we were. With exceptionally high coal inventories among Chinese IPPs, it's difficult to see what would prompt a coal price rise through the rest of this year. Yet, earlier heavy sell-offs made for a less demanding stock valuation. We anticipate that BANPU will track sideways until there is a demand revival triggered by de-stocking in China. Based on our earnings forecast cut, we have slashed our YE12 target price to Bt608 from Bt700.
Outlook for thermal coal remains subdued: Although thermal coal prices have fallen sharply YTD (now below the cost of production for marginal operators), MS believes that the industry will endure further pressure before adequately responding to oversupply. We have conservatively adopted probability weightings for Newcastle thermal coal projections under MS’s bear- to bull-case coal price scenarios. Our scenario-weighted thermal coal price forecasts for 2013 and 2014 are US$103/t and $107/t.
Coal price weakness likely to prevail—Chinese coal inventory at a 3-year high: IPP coal inventory in China has unexpectedly risen to 25 days—its highest level since 2008/09 crisis period. The stock-building is due to widening price differentials between domestic and seaborne prices, which has prompted Chinese power generators to stock up on coal. While China is entering into a traditional July-August peak power demand period for the year, de-stocking is unlikely for as long as the big price gap persists.
Forecasts cut further, but volume growth profile mitigates earnings squeeze: As we have adopted a bearish view on the 2H12 coal price outlook and have also fine-tuned for lower-than-expected YTD prices, we have trimmed our FY12 profit forecast by 13% to Bt11,848m. In sync with our scenario-weighted thermal coal price forecasts, we have also slashed our FY13-14 earnings projections by a further 27% and 28%, respectively to Bt10,733m and Bt13,371m. Yet, we assume a modest swing range of -25% to +32% for our FY13 earnings projections, based on MS’s bear- to bull-case scenarios.
What’s in the price? Scope for further downside limited: Despite the gloomy outlook, BANPU’s 37% stock price retreat from its Feb peak and its past underperformance against the NEWC Index and regional counters suggest that the risk of further share price downside is limited. The stock currently trades at its long-term average forward PER, which implies a long-term coal price of only US$83/t, comparable to the production cost of marginal operators.
Outlook
Outlook for thermal coal remains subdued: Although thermal coal prices have fallen sharply YTD (now below the cost of production for marginal operators), Morgan Stanley (MS) believes that the industry will endure further pressure before adequately responding to oversupply (see Figure 2). Weaker seasonal demand for base load power in all major coal consuming countries in the face of excess supply (brought about because the shale gas revolution in the US has slashed the price of gas in the US by two thirds) has prompted MS to downgrade its Newcastle thermal coal price forecasts by 13% to US$105/t in 2013 and 12% to $110/t in 2014 (see MS’s Global Metals Playbook: 3Q12—“Staying cautious, remaining selective”, June 28).
As the Eurozone sovereign debt crisis represents the key downside risk to MS’s base-case price scenario, we have conservatively adopted probability weightings for Newcastle thermal coal projections under MS’s bear- to bull-case scenarios in order to incorporate the most significant downside risk of EU fiasco into our BANPU model. Based on MS’s probability weightings for the global economy, our scenario-weighted thermal coal price forecasts for 2013 and 2014 are US$103/t and $107/t (see Figure 1), respectively.
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