Banpu

Banpu Plc (BANPU)

CFO, Ms Somruedee Chaimongkol, on a domestic NDR. There remain concerns about the coal price outlook, due to several factors—shale gas in the US, which prompted US supply-dumping and China’s GDP growth slowdown—and diminished earnings expectations have reduced investor appetites for the stock, but we hold the view that its YTD underperformance has already priced in the concerns. Following production cutbacks among Indonesian and Australian operators, we believe coal prices have bottomed out. Signs of a demand revival and re-stocking in China (MS anticipates by late 4Q12 or early 2013) would boost sentiment toward coal and BANPU’s share price.    
In order to fine-tune for CEY’s 1-2mtpa diminished output plan for 2012-15 and BANPU’s guidance of its revised FY12 ASP target of US$95/t (our earlier estimate was $100/t), we have cut our profit projections by 16% for FY12 and another 10% for FY13 and slashed our target price to Bt540 from Bt608.

Demand for thermal coal amid development of shale gas: Most investors expressed concerns that the develop-ment of shale gas would impact on demand for thermal coal. BANPU’s CFO admitted that cheap US gas (now US$2.8/mmbtu) had reduced American demand for coal. But, the coal demand slippage will also force out US coal operators. In China, shale gas production won’t start till 2020. Furthermore, China probably lacks sufficient water resources to extract as much shale gas as it might like. BANPU still anticipates demand growth for thermal coal in Asia of 5-6% a year with a global growth of 2-3% annually.

Prospects for the thermal coal market: Investors expressed doubt that coal prices would recover, given no clear signs of a revival in demand and the fact that US supply-dumping onto Asian markets has hit hard on Asian coal prices since early this year. In contrast, management believes coal prices have already bottomed out. But a strong bounce is unlikely in near-term—Chinese coal imports would have slowed, due to high inventories at its IPP plants. She pointed out that US supply-dumping has now ended and flows of output cutbacks would buoy the medium-term outlook.

Outlook for 2H12 and 2013 earnings: 2H12 profit will be flattish HoH. Despite a falling ASP trend, higher sales tonnages at both ITMG and CEY and cost saving programs should offset the effect of lower prices. Under BANPU’s NEWC projection of US$95/t for FY13, it guides for flat YoY earnings (we expect 9.5% YoY expansion, based on MS’s scenario-weighted NEWC projection of $103/t). Management claims that higher sales (from 44mt in FY12 to 48mt for FY13) and further cost reductions at ITMG should offset the effect of weaker ASPs.