PTT

PTT Plc

Make tender offer for 100% stake of SAR coal business worth of B30bn.

PTT Mining Limited (PTTML – PTT holds 100% stake) has announced a tender offer for the remaining shares in Sakari Resources Limited (SAR or the previous Straits Asia Resources Limited) which operates coal mines in Sebuku and Jembayan in Indonesia. At present PTTML holds 514.7 million common shares in SAR or 45.3% of total shares. The voluntary cash offer is 1.9 Singapore Dollar per share, worth of B30bn in total. The offer for the rest 54.7% stake in SAR in order to raise shareholding in the company to 100% is in keeping with PTT’s strategy to expand its coal business with a goal to produce coal at 70 million tons a year by 2020 from the current capacity of around 12 million tons a year from its current shareholding in SAR. The tender offer process will be complete by October 2012.

Positive perspective toward SAR acquisition.

Expand investment in coal business The attempt to acquire the entire stake in SAR marks PTT’s earnestness to expand its coal assets. Moreover, the business acquisition is also made at the right time when coal price is decreasing (but in the long run coal price would flip to stand at a high level again from demand for coal in Asia which still
grows average by 5% each year due mainly to demand for coal as a fuel for coal power plants, basic utilities in many countries including China, India, and Japan), so the cost of this round of investment drops to only US$12/reserve ton from US$19/reserve ton in the previous round of acquisition (45.3%, worth of B16.6bn on 11 November 2010) for current coal reserves of SAR at
around 146 million tons in total from its investment in 2 coal mines, which are Sebuku and Jembaya. However, compared with the market coal price at US$8-10/reserve ton on average, the acquisition of remaining stake of SAR is made at a slightly higher price. The 100% stake holding in SAR will not post significant benefit on PTT in the short term as profit of SAR in 2012 is
projected at around B3bn, which is only 3% of PTT’s net profit (under a forecast for production capacity of 12 million tons a year). Nevertheless, share of profit from the coal business will gradually increase to meet the targeted 14 million tons a year in 2013 (so share of profit will increase to B3.5bn or 3.2% of PTT’s net profit forecast for 2013) and 17 million tons a
year in 2014 (share of profit will increase to B4.3bn or 3.7% of 2013’s net profit forecast).

Reiterate Buy. Top pick of energy sector
We recommend Buy for PTT. Fair value at end-2012, DCF and sum of the parts, is B390.33/share. After the tender offer for remaining 54.7% shares of SAR complete, it will add value to PTT by B2.13/share to B392.46/share. In addition, earnings in 2H12 tend to recover, while the share price is still laggard compared with peers. Moreover, interim dividend is estimated at B5/share or a dividend yield of 1.5% (semi-annually).