Banpu

Banup Plc 

 

Investment thesis

With this year’s sub-par core operation, non-recurring items seem to weigh on BANPU’s FY15 NPAT outlook, spurring significant consensus earnings cuts. After Hongsa starts operations and the coal price has stabilized, we believe its earnings volatility is set to improve from 3Q15 and resume spectacular growth into 2016. BANPU is deemed a value play—the current valuation of 0.9x P/BV has largely priced in subdued coal; and only reflects the value of its power assets, which will reach ~2,200MW by YE17. If simply benchmarked with comparable Thai utilities counters (at EV/MW of US$1m), their power market cap is equivalent to BANPU’s market cap today—by which it plans to list its power assets onto the SET within 1Q16.   

2Q15 revisited—Another quarter of slim profit …

We have renewed pessimism about 2Q15 and now expect BANPU to post another quarter of slim profit at Bt95m versus Bt69m in 1Q15 and Bt682m in 2Q14. Apart from poor operations caused by ITMG’s falling ASP and a longwall move by CEY, the bulky non-recurring expense from loss on coal hedging of US$10m will be another hit. Operationally, ITMG’s ASP will fall a further US$3/t QoQ—while rising diesel cost and the effect of lower price realization will squeeze GM by 500bps QoQ. The seasonal longwall move will cut CEY’s output, and so GM, by another 500bps QoQ. With those twin effects, we expect its core number to flip into red—the first time in 10 years.            

… but a strong upturn is pending in 3Q15  

The worst of operations seem to be over in 2Q15; and the start-up of the first Hongsa unit (in June) will present a strong upturn in 3Q15—we anticipate its core number to bounce back strongly to Bt742m. On top of Hongsa, without the scheduled longwall move, CEY operations would have normalized with recovering GM and tonnage sales. The recent contraction in oil prices will help to mitigate diesel costs somewhat and will likely flatten ITMG’s GM QoQ, albeit in anticipation of further slippage in ASP, we believe. Also, QTD depreciation in THB/USD rate would be an upside risk to our NPAT projection (see Figures 1-3 on Page 4).

Forecasts cut—coal could run at a loss 

Non-recurring items amid tiny earnings from operations have intensified the volatility of the firm’s FY15 earnings. Fine-tuning this with the 1H15 non-recurring losses of Bt500m (from FX and coal-hedging contracts) and our lower ITMG FY15 ASP assumption to US$56/t (from US$58/t), we slashed our FY15 NPAT forecast by 42% to Bt1,488m. Based on the lower coal price benchmark (NEWC) for 2016 of US$60/t (on par with 2015’s), we also cut our ITMG FY16 ASP projection to US$52/t (from US$58/t) and trimmed our FY16 NPAT estimate by 37% to Bt3,314m.    

Growing power a downside protection 

The subdued coal outlook indicates that BANPU’s operation will continue its loss-making through 2016. However, based on our revised model, we see only little scope (if any) for downside. Solid contributions from Gaohe, consistent equity incomes from BLCP and China power assets, and Hongsa’s start-up, will mark a supportive baseline for earnings—all of which is forecast to contribute Bt2bn this year and about Bt4bn next year. Soon-to-be-awarded PPA on a 30%-owned 1,200MW coal-fired plant in China should boost its power contribution and support earnings growth after 2017—we roughly estimate equity income of US$30-35m a year.