Banpu

Banpu Plc (BANPU) 

Investment thesis: We attended BANPU’s analyst meeting last Friday. Despite the recent coal price weakness, we feel that near-term bottom-line risk is limited and BANPU will be the least prone to 2Q12 earnings fluctuations of any firm in Thai Energy space. Given our long-term positive coal price outlook, we think the current valuation is too low—it implies a coal price of only US$78/t; MS’s long-term estimate is $100/t. The forecast rebound in coal prices with Chinese seasonal restocking (expected by mid-year) and the firm’s earnings uptrend will potentially catalyze the share price.  
Prospects for long-term coal price: Management told us that concerns about gas substitution and US coal supply dumping on Asian markets might squeeze short-term coal prices, but not demand-supply fundamentals. The benchmark price is unlikely to fall below US$90/t, as the mean cash cost of marginal producers has surged to $120/t. A price retreat would force out high-cost operators, bringing on immediate supply tightness.
Under the worst-case scenario, BANPU would be secure, as it is a low-cost producer (US$55/t). The mean cash cost of US and Russian operators is almost $80/t. The long-term prospects remain good. Wood Mackenzie, a coal consultancy, projects that global thermal coal demand will rise by 230mt during 2011-15, up 30%, and the average cash cost of new coal projects will rise to the $100-110/t range (see Figures 1-3). 
Despite coal price fall, bottom-line risk limited: BANPU has cut its ITMG ASP target to US$98-99/t from $102-103/t previously. But we still believe bottom-line risk is low, so we maintain our FY12 profit forecast unchanged. A falling coal price means that the firm will realize huge gains on coal swap contracts—management guided for total gains of $50m, based on the current spot price. Note that BANPU has swap contracts for 3mt at $115/t. Also, we remain optimistic about its 2Q12 profit. Apart from the aforesaid gains, higher ITMG sales tonnages (up 15% QoQ) and a peak contribution from BLCP, due to greater power dispatching to EGAT, will boost the bottom-line.
Higher output growth—upside to long-term earnings: Management has revised up its guidance for ITMG’s post-2012 production growth by 2mtpa, which would mean 30mt in 2013 and 32mt thereafter. As such, BANPU’s effective sales tonnage target rises 50% to 62mt by 2015 from 2011’s 42mt. Commercial production at the Hunnu Mine (Mongolia) would augment earnings. Management targets Hunnu starting production in 2Q12 with output of 1mt this year, ramping up to 2mt in FY12 and to 5mt by FY15. Our estimate suggests that the project would add Bt200m to the bottom-line this year and Bt400m in FY13.