Banpu

Banpu Plc (BANPU)
Site visit. We visited BANPU’s largest coal mine in Australia – Mandalong – and the
export port in Newcastle – NGIC. This mine is one of BANPU’s key assets, with annual
production of 5mtpa, or ~30% of the coal produced from its portfolio in Australia. It
was also the major source of its weak 1Q13, which arose because of the extended
period required for longwall relocation, but this process is now improved. Production
was back to normal in 2Q13 and longwall period shortened. We believe this implies
that BANPU’s quarterly performance has bottomed out and expect to see gradual
improvement of earnings going forward. We still rate it a BUY with TP of Bt440/share.
Operations at Mandalong back to normal. We went down to see the underground
mining operations at Mandalong mine in Australia, which returned to normal in 2Q13
after a longer than expected longwall relocation in 1Q13 which halved EBITDA margin
to only 15% in 1Q13 from its average 30%. The problem of the lengthy period required
for longwall relocation has been resolved by using a new generation of equipment to
prepare the roadway for the longwall and management expects to shorten the
relocation period to 15-17 days, down from nearly a month.
Cost reduction programs being implemented. Centennial’s management
continues to target a 5-5% cost reduction in 2013F by reducing the number of
contractors and employees by ~10% and suspending production at high-cost mines.
Also, the capital expenditure is being limited to only essential, committed items in
order to optimize production cost. Investment in its own infrastructure – a railway and
a dedicated port at NCIG - provides a competitive distribution cost and flexibility. The
company plans to focus on improving production at low-cost mines to increase
volume and thereby reduce unit cost.
Re-pricing legacy contracts to continue. Centennial recently entered into an 8-year
coal supply agreement with Origin Energy for 24.5mt of coal for Eraring power station
staring in 2014F. This replaces the legacy contract with this power company on which
price was relatively low. Coal selling price is now placed at export parity, which we
believe could be A$15-20 higher than the legacy contract price. Note that ~51% of
Centennial’s coal sales for 2013F is still committed to domestic legacy and 14% is sold
domestically at export parity price.
Tempting valuation with upside on dividend. BANPU’s share has declined by 45%
since the beginning of this year. It is now trading at only 7x 2013 P/E and more
importantly 0.7x PBV vs. its historical average of 2x for the past ten years. Its dividend
yield is also supportive at 5.7%-7% for the next three years, partly boosted by its share
repurchase program. We expect the company to decide to pay an extra dividend this
year since that its share repurchase program was completed at a 35.7% (Bt8.5/share)
lower cost than budgeted. BANPU has decided to cancel the repurchased shares from
registered capital.