Banpu

Banpu Plc

Our visit to Banpu’s biggest Australian coal mine confirms our view that its Australian unit will see earnings recovery in FY14, thanks to improved pricing from the renegotiation of its low-price legacy
contracts. The poor overall earnings visibility makes us wary though.

We are still concerned over the derating catalyst of declining coal prices due to weak demand from
China and excess coal supply. We maintain our FY13-15 EPS estimates but cut our SOP-based target price by 10% to reflect our lower long-term coal price of US$87/t (from US$90/t).
We upgrade Banpu from Underperform to Neutral, as there has been a 40% share price correction
since our downgrade in Feb 2013.

What Happened
We came back from our Australian visit to Banpu’s Mandalong coal mine and Newcastle port with more confidence in the earnings recovery of Banpu’s Australian mining operations.
Newcastle coal port is the largest port in Australia with capacity of 53mtpa, the 24% capacity expansion should should boost Banpu’s coal export in 2015.

What We Think
We believe there are both near-term and long-term earnings catalysts for Banpu’s Australian coal units. In the near term, Mandalong’s operations will return to normal after a 4-week longwall changeover period in 1Q13, which lowered production to a mere 0.8mt and incurred higher costs in
1Q13. In the medium-term, two key catalysts for Banpu’s FY14-16 earnings are the repricing of its legacy contracts and the lower logistics cost for its domestic sales.
 

What You Should Do
Although its share price has declined by 40% since Feb 2013, we believe Banpu remains a market performer at best because of its low earnings visibility from the coal price downtrend. We upgrade Banpu from Underperform to Neutral due to the sharp share price correction. The stock now trades at 10.3x CY13 P/E, a premium to the 9x average of its Indonesian coal peers. Banpu’s EV/Reserve valuation is US$5.20, higher than the US$4/t average of its Indonesian peers