BANPU

Banpu Plc (BANPU) 

Net profit was below estimate

BANPU posted an anemic bottom-line of Bt66m for 4Q14, down by 50% QoQ and 90% YoY. The number was below our estimate (and the consensus) of about Bt150m. The disappointment was largely due to heavy losses on diesel hedging—the firm reported US$33m; we had assumed only $25m. Stripping out all extra items, the core number would be Bt501m (in line with our expectation)—down 60% QoQ but up 358% YoY. BANPU announced a 2H14 DPS of Bt0.70, implying inspiring yield of 5.1% on annualized basis. That also beaten up our assumption of Bt0.50, making for a full-year DPS of Bt1.20—on par with the 2013 payout (XD on April 10).

Results highlights

The negative highlights were: 1) a one-off loss from diesel hedging contracts totaling US$33m, 2) BLCP’s profit contribution slumped to $2.5m ($17m for 3Q14), due to a planned maintenance shutdown, 3) the respective sales volumes of ITMD and CEY dropped from 7.7mt and 4.7mt in 3Q14 to 7.4mt and 3.7mt in 4Q14 on seasonality and a scheduled long-wall move for CEY. On the flipside, although ITMG’s ASP slipped a further 6% QoQ to $63/t from 3Q14’s $67/t, it reported a 400 bps QoQ GM surge to 34%. A lower diesel cost was partly responsible for the improvement, in our view. In contrast, CEY’s GM dived to 23% from 3Q14’s 32%, as expected, due to its long-wall move.    

Outlook 

ITMG’s firm-priced volume obliged so far at US$60/t means that in 1Q15 its ASP will fall another $3/t. But we regard this as only a one-off event, as this price realization will prevail only into 2Q15 (assuming that the recent coal spot price increase is sustained). Also, the Indonesian diesel price has dropped from $0.8/liter in 4Q14 to $0.7/liter YTD, which together with reduced stripping ratios mean a production cost decline of $3-4/t, which mitigates the effect of pricing risk. Moreover, the re-start of BLCP will boost the 1Q15 bottom-line.      

What’s changed?

While we expect sub-par earnings to prevail through much of FY15, due to the weak coal price climate, we don’t see much risk of further downside from our below-consensus forecast either. The aforesaid firm-priced contracts mark a supportive base-line for price realization, as BANPU entered into the obligations when the spot coal price ranged only $62-65/t during Oct-Dec. The price today is $69/t.      

Recommendation

We remain bullish on BANPU. Although we expect another consensus profit forecast cut and earnings won’t hit bottom till 2Q15, we think its current below-BV valuation is no longer deserved. Our below-consensus 2015 spot coal price assumption of US$64/t indicates that BANPU will remain profitable and earnings risk is limited. The start-up of the Hongsa plant by mid 2015 will boost forward profitability and ROE should to rise to near the level of regional counters in FY16.