Banpu

News: On September 20, the Civil Court ruled against BANPU on the dispute between
the company and its former JV partner in developing the Hongsa project, Thai-Lao
Lignite (TLL). The court has ordered BANPU to pay TLL cash of Bt4bn plus 7.5% interest
from the day the case was accepted by the court until it completes the Bt4bn
payment. It is also being required to make an annual payment of Bt860mn for 2015-
2027 and Bt1.38bn though 2039.
About the case: In 2007, a person and a related group of companies who were former
joint partners with BANPU in developing the coal mining and power plant in Laos, i.e.
“the Hongsa project”, filed a charge against BANPU and two subsidiaries, alleging that
BANPU, its subsidiaries and management had entered into the joint agreement
deceptively, with the idea of gaining information on the coal mine concession and
feasibility study reports of the lignite fired power plant project in Hongsa, Lao PDR.
They claimed a total of Bt63.5bn plus interest in damages. BANPU has filed a defense
and lodged a counter-claim against the plaintiffs in the amount of Bt4.487bn plus
interest. BANPU did not set aside any provisions for this case.
Comments:
The payments will slash BANPU earnings for 2012 by 40% if the case is finalized by
the end of this year. However, we tend to feel this is quite unlikely since BANPU
has the right to appeal the decision and intends to do so. And of course this will
take time. We estimate the impact from the annual payments at 5-9% p.a. until
payments end in 2039.
Using the worst-case scenario that it has to pay all of this, we estimate this could
wipe 12.5% off our DCF valuation for BANPU, to Bt490/share from Bt560/share.
We expect the market to take a very negative view on this, despite the fact that
BANPU will appeal the ruling, starting another long, involved process. At the same
time, we prefer to err on the side of caution and take this downside risk into
account, which slashes our TP from Bt560 to Bt490. In the interest of caution, we
also downgrade our rating from BUY to Neutral until the case is settled. Our
earnings estimate remains intact but there remains downside risk as noted.
Despite the Court’s ruling, the development of Hongsa will keep on keeping on. It is expected to begin to generate cash in 2015, with full-year contribution in 2018.
BANPU expects this project to contribute an EBITDA of Bt6bn p.a. in the first two years, declining gradually to Bt3-4bn after the first 12 years.