Banpu

Banpu Plc (BANPU)
The Civil Court verdict ordering Banpu to pay THB33bn in damages to its former partner in the Hongsa project is not only a serious threat to Banpu’s financial status but could also result in a long-lasting valuation discount.
We downgrade Banpu from Neutral to Underperform and cut our earnings forecast for 2012 by 31%. We also lower our SOP target price by 15% to THB422, assuming the damages will be paid in full, and earnings from the Hongsa project will be lost due to a prolonged delay. 

What Happened
The Thai Civil Court yesterday issued its judgment ordering Banpu to pay THB33bn in damages to its former partners in the Hongsa power project. Mr. Siva Nganthavee and a number of
his companies, including Thai-Lao Lignite, Hongsa Lignite, Thai-Lao Power and South East Asia Power, had sued Banpu and its management for allegedly deceiving them into signing an agreement for the sole purpose of gaining access to information on a coal mine concession and feasibility study report. The plaintiffs demanded total damages of THB63.5bn. Banpu denied the allegations and said there were no grounds for the claim. The court, however, found in favour of the plaintiff and ordered Banpu to pay damages of THB33bn in stages: THB4bn for the first year plus interest, and subsequently THB860m per annum in 2015-2027, and THB1.2bn per annum in 2028-2039.

What We Think
Although Banpu can still appeal the case, this unfavourable outcome will have a significantly negative impact on its share price, given that the market had expected the case to have
no effect on the company. We cut our SOP target price by 15%, or THB75/shr to THB422, estimating the full amount of impact on its valuation. For earnings, we cut only
2012F earnings by 31% assuming that Banpu will need to provide only for the first upfront amount of THB5.4bn.

What You Should Do
Sell on this fact given that the market had not expected this outcome. We believe this legal case will be an overhang on its share price as it is likely to drag on for a few more years. Fundamentally, Banpu’s earnings remains weak on lower ASP for coal given that coal prices remain on a downtrend.

Background of the case

Hongsa project: This US$3bn project is a 1,883MW lignite-fired power plant located in Hongsa, Lao PDR. The power generated will be mainly sold to Thailand’s state enterprise Electricity Generating Authority of Thailand (EGAT) and will be fed into the system in 2015. Banpu and its other Thai partner RATCH each own a 40% stake in the Hongsa project, while the remaining stake is held by Laos government.
Hongsa lawsuit: In 2007 Mr. Siva Nganthavee and his associated companies
- Thai-Lao Lignite (TLL), Hongsa Lignite, Thai-Lao Power, and South East Asia
Power (later called TLL group) – filed a civil suit against Banpu and its
management, demanding damages totalling THB63.5bn. Mr. Siva and his
associated companies alleged that Banpu’s management had deceived the TLL
group to gain access to information on the 1,800MW Hongsa coal-mine power
plant. The plaintiffs also alleged that Banpu had misinformed them on the
Hongsa project, resulting in the Laos government terminating the plaintiff’s
coal mine concession and power project agreement, and later handing the
project over to Banpu.
Banpu’s previous defence: Banpu had on 10 August 2007 released a
statement saying that Mr. Siva’s allegations were untrue, and that the claim for
damages unfounded. Banpu claimed that Mr. Siva and the TLL group had
previously persuaded Banpu to join them in developing the Hongsa project.
Since the project was in line with Banpu’s core business of coal and coal-fired
power, the company decided to enter into an agreement. Despite Banpu’s
co-operation and efforts during the development stage, the agreement was later
terminated by Mr. Siva and the TLL group without good reason or justification.
Fearing further delays to the Hongsa project, the Laos government
subsequently terminated the mine and power plant project agreement with the
TLL group. During the subsequent competitive bidding, Banpu was invited to
submit a bid and eventually won the contract.
TLL won in arbitration against Laos government: In separate
developments, the TLL group had won in an arbitration case against the Laos
government on the grounds of unfair termination. This was awarded in an
arbitration in Kuala Lumpur, Malaysia (Civil Appeal No:
W-02(NCC)-1287-2011 dated 4 Nov, 2009). Subsequently, the TLL group had
also appealed to the US Federal District Court, Southern District of New York,
requiring the Laos government to pay damages of US$65m (US$56m plus
interest) to the TLL group. However on 20 Mar 2012, the US court ruled that it
lacked jurisdiction to compel the Laos government to pay damages and the case
was finally closed (case no 1:11-cv-04363-KMW).
The verdict
Yesterday, the Thai Civil Court issued its judgment ordering Banpu and Banpu
Power to pay the plaintiffs damages totalling THB33.1bn comprising: 1) for
information of THB4bn with 7.5% interest (total THB5.7bn); 2) for the loss of
opportunity of THB860m annually from 2015 to 2027, and THB1.38bn
annually from 2028 to 2039. According to Banpu, this judgement will not have
any impact on the Hongsa project since it is operated by Hongsa Power, a JV
independent of the defendants. This project is thus in progress as planned.
Banpu has already secured a US$2.78bn loan to finance this project.
Impact on Banpu
While Banpu disagrees with the Civil Court judgement and will appeal to the
Appeals Court, we believe the unfavourable outcome will have a significant
negative impact on the company, given that Banpu is likely to have to fully or
partly provide for the damages in 3Q12. The appeals process could take many
years to complete and it could even be dragged to the Supreme Court, meaning
that it could be 5-10 years before we see a conclusion to this case.
Impact on earnings
We assume that Banpu will need to take an initial provision of THB5.4bn for
the information damage plus interest in 2012. As this case has not yet reached
the final verdict, we assume that the remaining amount of THB27.7bn will not
be provisioned, pending the development of the case in the Appeals Court. We
thus cut our earnings forecast by 31%

Impact on valuation
Although the impact to earnings may be low given that the case is not yet
finalised, and hence Banpu may not have to book the full amount of THB15bn
(NPV at 7.5% on unadjusted full amount of THB33bn), we believe this overhang
will significantly penalise its share price and valuation until the case is solved,
and Banpu wins the case. This, however, could take many years, and as a result
we decide to take the full penalty value of THB15bn. In addition, we also cut our
valuation for the Hongsa project to Banpu on the belief that the project is now
likely to be delayed given the uncertainty on the outcome of the case to Banpu.
This will cut our SOP valuation to THB422, down by 15% or THB75/shr.
Downgrade to Underperform. With a negative return of 4.5% from its
current share price, we downgrade Banpu from Neutral to Underperform. We
favour PTTGC (OUTPERFORM, target price THB77) for its high beta, strong
and sustained growth, and attractive valuation.