BANPU

BANPU Plc
- Coal business recovery remains fragile
According to the analyst meeting, BANPU still focused on a strategy of
operating cost reduction. The company aimed to reduce cost of a coal
mine in Indonesia by 5%yoy to US$58/ton in 2014, which would help
boost the gross margin that has already risen since 1Q14 to 38%
although coal selling price has stayed flat from the previous quarter at
US$70-71/ton. However, the recovery of a coal demand would be
gradual since the rising demand would come mainly from power plants.
For the next couple years, the coal industry will be in an oversupply
state because of a 3.9%yoy or 36 million tons increase in global coal
supply to 935 million tons in 2014, mainly from Australia, Indonesia,
Columbia, and South Africa, compared with the projected demand
growth of only 3.0%yoy to 912 million tons. Moreover, BANPU is
marching forward with its new investments, especially in a power
business in order to reduce revenue fluctuation in the long run; the
company is now negotiating for investing in a solar power plant in Japan
and waiting for a new round of IPP auction that it has planned to join to
develop the current location of BLCP Power for a new power plant.
- Profit to weaken in the rest of 2014
BANPU reported 1Q14 net profit at B1.8bn, skyrocketing 179.0%qoq,
beating projection mainly because an extraordinary profit from a coal
swap was larger than expected. Apart from the extraordinary profit of as
much as B1.1bn, overall gross margin exceeded projection to 34.7%
since gross margins of Centennial coal mine in Australia and ITMG coal
mine in Indonesia had increased from 25% and 35% in 4Q13 to 30%
and 38%, respectively. In addition, shared profit from BLCP (BANPU
holds 50% stake) reverted to a normal level of B640m. Overall, 1Q14
net profit accounted for 47.4% of our full year forecast. We maintain
FY2014 forecast, projecting 1Q14 profit to be the peak of the year. 2Q14
profit, on the other hand, would weaken from 1Q14 due to the following
factors: 1) selling price would decline since coal price usually has a three
to six month lag-time from the spot price; 2) Mandalong mine would be
closed for 20 day due to the longwall move, thus depressing sales
volume from 1Q14; 3) a high extraordinary profit from a coal swap
would not be booked like it did in 1Q14. Still, FY2014 net profit is
projected to grow by 20.6%yoy.
- Buy for long-term investment
2014 fair value (DCF) is B32. We recommend buying, focusing on longterm
investment. BANPU has possibly bottomed out; its PBV of 0.9x is
lower than the sector's average of 1.3x. However, Hongsa court case
can be a pressuring factor as long as an official judgment is not made.