Banpu

Banpu Plc (BANPU)

What’s new? BANPU informed the SET last night that the Civil Court ordered it to pay damages and massive annual payments for “lost opportunity” to Siva Nganthavee and associates. The court granted Bt4bn in damages (plus 7.5% annual interest backdated to the date of the complaint) to the Nganthavee group. Furthermore, it ordered BANPU to make annual payments to the group ofBt860m for years 2015-27 and Bt1.38bn for years 2028-39. BANPU will appeal the verdict to the Court of Appeal.
Background: In August 2007, the Nganthavee group filed a civil action against BANPU. It alleged that: 1) BANPU had deceptively entered into a joint development agreement with the group in order to gain information about Nganthavee group’s coal mine concession and study feasibility reports for the Hongsa power plant project and 2) BANPU then misinformed the govt of Laos, resulting in the Nganthavee group losing its mining concession. The group sought damages totaling Bt63.5bn.
Surprised, but we’re far from the end game: In our view, it’s still early to assume that the judgment will result in BANPU paying out the massive sum. Taking accrued interest expenses on the Bt4bn up-front charge plus 7.5% annual interest into account, we calculated a total cost of Bt33,483m. The case has taken five years to reach a judgment in the Civil Court. Even if BANPU were to lose in the Court of Appeal (which may take several more years), it could still petition the Supreme Court. The case is likely to be won by whichever party has the greatest endurance.
What’s a likely scenario? Based on the historical record of civil damages litigation in recent years, the auditor is likely to require BANPU to set a provision for the Civil Court award to Siva Nganthavee. But we believe that the amount is likely to be only the Bt4bn in damages (plus accrued interest back to August 2007)—a total of Bt5,743m (equal to Bt21/share).
The award for the opportunity loss (to be paid 2015-39)—at worst—need not be provisioned against till the first payment is due in 2015. If the firm were to lose in the Supreme Court, its payouts to the Nganthavee group would probably result in us slashing our annual Hongsa profit contribution projection to BANPU by 30%.

Possible impact on profit and DCF value: Pegged to our base-case scenario, the anticipated provisions would cause us to slash our FY12 profit projection to Bt4,219m from Bt9,961m previously. Moreover, we are adopting a more conservative stance in valuing the firm by assuming a yearly payment for the opportunity loss to the Nganthavee group, 2015-39. As such, we have cut our DCF-derived target price to Bt504 from Bt540.
Action: While this litigation has years more to run, the news of the Civil Court damages award will generate negative sentiment toward the stock—we anticipate 7-8% downside to the current share price. Apart from the subdued coal price outlook, the ongoing litigation is likely to reduce investor interest in BANPU. We have, therefore, downgraded our rating from BUY to HOLD with lower DCF target price of Bt504.