Banpu

Banpu Plc (BANPU)
BANPU’s efforts to control operating costs to battle lower coal prices have begun to pay off as seen a widening gross margin leading to earnings improvement over the last two quarters. The improvement is expected to continue through 2014. In our view, the market is too pessimistic on coal price outlook: we believe support will be provided by more production cuts in 2014F. We maintain BUY on attractive upside to our DCF-based TP (Bt36/share) plus dividend yield of 3.4-3.8% for the next three years.
2014F coal sales target for Indonesia flat YoY. BANPU recently cut target sales volume for Indonesian coal in 2014F to 29.3mt (flat YoY) from more than 30-31mt originally, expecting coal prices to remain low next year. We expect similar reductions by other Indonesian and Australian coal miners, since new coal mines are operating at below cash cost. We expect to see more disciplined coal production among key players to reduce oversupply in the market. BANPU’s 2014F sales volume will be driven mainly by higher target sales volume for Australian coal, set at 14.4mt (equity basis) for 2014F, up from 13.7mt in 2013.
Selling price of 21% of Indonesian coal sales is fixed. Although the company still is bearish towards coal price outlook until mid-2014, its strategy to minimize the fixed-price portion for 2014F sales volume suggests a more positive view on coal price in the later quarters of next year. About 60% of BANPU’s 2014 volume (Indonesia) has been sold and the selling price for 21% of total target sales volume is fixed at ~US$74-75/t. It has hedged ~9% of total target sales volume at benchmark coal price of US$82-85/t vs. the current Newcastle price of US$83-84/t. The ASP for Australian coal is expected to rise to A$76/t from an average A$68/t in 2013 from re-pricing domestic contracts and a higher portion of exports.
More cost reductions. On the cost side, BANPU estimates the Australian operations can shave A$100mn off costs in 2013 from mine closure and staff reductions, the latter of which will lead to one-off redundancy costs of US$20mn in 4Q13. It will put more of its cost reduction program in place in 2014F. The Indonesian coal business has been able to lower total cost/unit via a cost reduction program, including an in-pit conveyor & crushing facility to reduce energy cost plus renegotiating barging contracts. We estimate further improvement in gross margin to 34% in 2014F from 32% in 2013.  
Seeking coal-related opportunities. With coal price outlook remaining somber, BANPU is looking for new investment opportunities in coal-related business. This includes coal-fired power plants in Southeast Asia, China and Australia, where it would be able to leverage its expertise in developing coal-fired power plants, looking particularly at those with synergy with its coal business, i.e. mine-mouth power plants. Apart from power generating, BANPU is eyeing new opportunities in coal-related businesses including oil and gas (coke and coal tar project) and petrochemical. This could be potential for its coal business in Mongolia (Hunnu).