Banpu

Investment thesis

We remain bearish on the coal price outlook—a YE14 coal price rally is very unlikely ahead of stock-building season in China, given high coal inventory at Chinese IPPs of 32 days (the normal range is 15-19 days—and a street earnings forecast downgrade is ahead). But there is only limited downside risk to BANPU’s stock price, so we have upgraded our rating to HOLD from SELL. Two positive factors have emerged: 1) the recently agreed Japanese Benchmark Price (JBP) of US$73.5/t (a $10 premium to the current spot price) offers short-term relief for pricing during negotiation season this month and 2) the oil price fall will cut ITMG’s production costs significantly. 

Latest contracted price eases pricing risk (but street cut still ahead)

While the regional spot coal price has gone from weakness to weakness, the latest agreed JBP of US$73.5/t between Japanese offtakers and Australian suppliers is relevant to contracted price negotiation season, Nov through early 2015. BANPU is also looking to firm up coal tonnage for 2015 this month—50% of planned sales tonnage is typically contracted by year-end. The recent JBP was in line with our FY15 price assumption. It translates into an ITMG ASP of $63/t (as modeled) and makes our (deeply below-consensus) FY15 NPAT forecast of Bt3,245m (we recently upped the number by 11% to factor in the start-up of Hongsa unit 1 in 3Q15) look clearly achievable.

Oil price fall—margin booster  

The lower oil price outlook is a boon to ITMG (diesel comprises ~35% of its output costs). The US$20/bbl oil price dive during the past two months will squeeze ITMG’s production cost by US$1.5-2/t, boosting BANPU’s yearly profit by Bt0.7-1bn (ceteris paribus). However, lower costs might also mean that Indonesian suppliers would accept lower prices for coal, which would squeeze regional coal prices. With that in mind—assuming that the current oil price level prevails through 2015—the low diesel cost would offset the effect of ITMG’s ASP being US$60/t instead of our expectation of US$63/t.     

Diminished 3Q14 outlook—but oil price fall to bounce 4Q14 number

We have cut our FY14 NPAT forecast by 16% to Bt3,170m, due to a diminished expectation for 3Q14. Our model points to a 3Q14 bottom-line of Bt315m, down by 54% QoQ and 67% YoY and far below the Bloomberg consensus of Bt1bn. Our new estimate factors in net extra losses of Bt1.1bn from: 1) diesel hedging contracts (ITMG secures one-third of its diesel usage) and 2) CEY’s unexpected write-downs on tax waivers following the repeal of the Australian Mineral Resource Rent Tax. 

But we expect the 4Q14 number to beat the street estimate. The fourth-quarter is typically the earnings trough for the year, while CEY has a longwall move scheduled and BLCP will be shut for maintenance. But the oil price dive will mitigate the impact of a lower 4Q14 top-line—we now model for NPAT of Bt372m.