Banpu

Banpu Plc (BANPU) 

Investment thesis

We have turned bullish on BANPU and upgraded our call from HOLD to BUY. Although we expect another consensus profit forecast cut and earnings won’t hit bottom till 2Q15, we think its current below-BV valuation is no longer deserved. Our below-consensus 2015 spot coal price assumption of US$64/t indicates that BANPU will remain profitable and earnings risk is limited—further cost savings from the oil price dive and reduced stripping ratios almost offsets the effect of a further slippage in ASP. The start-up of the Hongsa project by mid-2015 will boost forward profitability and ROE is expected to rise to near the level of regional counters in FY16. Our PBV-to-ROE approach implies a 1.2x PBV for BANPU (comparable with regional peers). We have a PBV-based target price of Bt33.50 (up from Bt25.50 previously).   

Weak 4Q14 now behind us—oil price dive to mitigate ASP slippage … 

We have cut our FY14 NPAT estimate by 14% to Bt2,770m, as an unexpected loss on oil hedging obligations of about US$20m will be booked for 4Q14. Our revised model indicates only slim 4Q14 NPAT of Bt156m, up slightly from 3Q14’s Bt131m. However, the assumed core number of Bt809m is decent, albeit down 36% QoQ, due to an annual shutdown at BLCP, a scheduled long-wall move at a CEY mine and further slippage in ITMG’s ASP. For ITMG, the $0.3/liter diesel price fall in Indonesia during the quarter would have reduced its production cost by $2.5/t, which would have offset the effect of lower ASP, in our view.  

…limited scope for downside to our model (but street cut ahead) 

While we expect sub-par earnings to prevail into FY15, due to the weak coal price climate, we don’t see much risk of further downside from our below-consensus forecast either—our FY15 profit forecast is 28% below the street. ITMG’s firm-priced volumes obliged so far at US$60/t comprise under 45% of its FY15 sales tonnage, marking a supportive base-line for price realization, as BANPU entered into the obligations when the spot coal price was at a low of $62-65 during Oct-Dec versus today’s $69/t. 

Moreover a US$0.4/liter YoY decline in the Indonesian diesel price translates into a $4/t cut in production cost. There will also be another $2-3/t saving from reducing stripping ratios by 0.5-1x across its mines. The two factors will cut ITMG production costs by $6-7/t to $52/t for FY15. The scope for cost savings almost offsets the effect of expected $7/t YoY slippage in ASP to US$60/t for FY15.    

Earnings to bottom out in 2Q15—Hongsa a key driver for 2H15 

The aforesaid firm-priced contracts mean that in 1Q15 ITMG’s ASP will fall another US$4-5/t. But we regard this as one-off impact, as this price realization will prevail only into 2Q15 with scope for upside—if the recent uptick in coal spot price proves sustainable. Yet, the continued decline in the Indonesian diesel price from US$0.8/liter in 4Q14 to $0.7/liter YTD and reduced stripping ratios mean a total $3-4/t cut in production cost, which mitigates the effect of pricing risk. Moreover, the start-up of the Hongsa project will boost BANPU’s forward profitability, starting 2H15—unit #1 is slated to COD in mid-2015, unit #2 and #3 by Nov 2015 and March 2016, respectively—each unit is forecast to contribute $24m/year (based on BANPU’s 40% stake). 

Recent coal price rally beat expectation—but is it unsustainable?

The 15% rise in the spot coal price is a positive signal—it is now 8% above Morgan Stanley’s mean 2015 spot assumption of US$64/t. If it is sustained through 2015, our FY15 profit forecast would rise 15%. This is because 55% of ITMG’s sales tonnage sales has yet to be committed (BANPU plans to contract that tonnage in 2H15, when coal prices are expected to rebound). Nevertheless, we regarded the recent spot price spike as largely a seasonal effect—weather and restocking. The price normally falls when Chinese weather starts warming up in March.