Banpu

Banpu Plc (BANPU)

Share price has plunged 70% from peak in 2011 against a much lower fall of 38% in the price of coal, and although there are still no signs that coal price will start back up soon, we see limited downside now, particularly with book value at Bt292/share as of end-1Q13. We also believe 1Q13 was the nadir for quarterly profit. Though the Hongsa Power court case will overhang price, legal wheels turn very slowly and resolution is far away. Our DCF-TP for 2013F remains intact at Bt440/share, to which upside is still attractive.    
Share price has plunged 70% from peak in 2011 against a much lower fall of 38% in the price of coal, and although there are still no signs that coal price will start back up soon, we see limited downside now, particularly with book value at Bt292/share as of end-1Q13. We also believe 1Q13 was the nadir for quarterly profit. Though the Hongsa Power court case will overhang price, legal wheels turn very slowly and resolution is far away. Our DCF-TP for 2013F remains intact at Bt440/share, to which upside is still attractive.    

Share price correction overdone. The market’s concern about the drop in coal price due to influx of extra coal supply from the US and possible financial impact of the legal dispute over Hongsa Power shoved share price down by 70% from its peak in 2011 and 41% from our latest rating downgrade. We see this share price correction as overdone, as coal price has stabilized and any impact from the court case is far in the future.
Coal price range-bound at bottom. Regional thermal coal price has fallen 38% from its peak (post-2008 financial crisis) to range at US$80-90/t. We believe this forms a strong support level for regional coal price due to high cost of new coal supply. Nonetheless, outlook for coal price remains grim, with more supply from Indonesia and Australia in the market. We expect BANPU’s average coal price target for 2013F to fall to US$80+/t from US$90.23/t in 2012 for Indonesian coal and to ~A$68/t for Australia from A$76/t in 2012.
Hongsa case years away from finalization. Any adverse impact from the court case involving the Hongsa project is, in our view, already in the share price. It will also take at least ten years before the case will be finalized - five years for the appeal and another five years for the final ruling by the Supreme Court. Management is confident that even in the worst case that it has to pay the plaintiff, impact on its annual earnings will be small, as payments will be made on an installment basis.
Quarterly earnings should have bottomed out in 1Q13. BANPU’s 1Q13 net profit was disappointing, plunging 58.5% YoY and 55.3% QoQ to only Bt925mn, the weakest quarter since 2006. Pulling it down was weak margin for its coal business in Australia due to long-wall relocation, which also reduced sales volume in the quarter. We feel this was the year’s worst quarter, with earnings likely to recover from 2Q13F on as operations in Australia are back to normal. We expect to see earnings upgrade by the street once 2Q13F is out and market confidence in BANPU recovers.
Valuation appears tempting. After the deep share price correction, we believe it is now time to accumulate the stock with PBV multiple attractive at only 0.8x for 2013, vs. its historical average of 2x for the past ten years. Last time it was traded below 1x PBV was in Oct 2008 - during the last financial crisis – then it picked up strongly to above 2x within six months. Dividend yield is also supportive at 5%-6.2% for the next three years, partly boosted by its share repurchase program. We believe BANPU will cancel the repurchased stocks six months after the repurchase is complete.