Banpu

Banpu Plc

NDR: Investors still like BANPU. We arranged a non-deal road show for BANPU last week to meet investors in Malaysia, Singapore and Hong Kong. Their interest centered on the thermal coal market and price outlook and how BANPU was affected by the currently weak coal price. Most of the update provided by BANPU was not new to us –and it is our impression that most investors remain confident in BANPU and expect the price weakness to be short-lived. Our BUY rating is intact with TP of Bt560 as we believe regional coal has bottomed out and will recover from 4Q12 on higher oil price and production cutback.

Highlights from the NDR:
-Management expects coal price to recover gradually through 4Q12 upon production cutbacks, mainly by high-cost producers of low-quality coal, and remains optimistic on coal price outlook in the medium term. It will weather the weakening coal price in the near term by proactive measures that include reducing production cost, mainly via lowering its strip ratio by 0.5x for the remainder of this year, which cuts cash cost by US$3/t.

-Investors seemed to be concerned that BANPU's customers would default on their coal contracts in the presence of a weaker coal price. Management responded that it has been holding talks with its major customers – mostly power plants, and they have agreed to continue to honor the contracts. On its side, BANPU has agreed to delay some of the high-priced shipments until the situation improves; in return these customers have agreed to extend their contracts.

-Management reaffirmed its coal sales volume of 26mt from Indonesia since it has sold all of its coal. At the same time, the actual delivery still hinges on the weather – whether or not it will remain favorable for production. Management expects coal production of more than 7mt/quarter in 2H12.

-BANPU has reduced its 5-year capex plan by 30% or US$500mn to US$1.248bn,mainly by extending the development phase of Newstan mine expansion in Australia and production startup of the Mongolian coal mine to 2013 with target sales volume of 2mtpa. Also, it has postponed some mining development in Indonesia. It will, however, continue to develop Bontang coal terminal to accommodate more coal from Bharinto coal mine.

- Management stressed that its priority is to maintain a strong financial position to support a high dividend payout of 50% and also to set aside enough cash to get in on any new and promising investment opportunities. We note that BANPU will be paying an interim dividend of Bt9/share, unchanged from 1H11, although its net profit was much weaker YoY.

- BANPU believes the impact from US shale gas and coal exports to Asia will be
short-lived since several coal producers are in the red at current prices and planning to rationalize production to cope with the weakening coal price.