Banpu

Banpu Plc

 

We upgrade our recommendation on BANPU from Neutral to Outperform as attractive investment stories emerge for both the short and long term. In the short term, the recent weakness in BANPU’s share price has widened the upside to our 12-month target of Bt24.7 to 18.8%, while expected superb 3Q15 earnings and a potential recovery in the thermal coal price in 4Q15 could act as share-price catalysts. Meanwhile, we think that at their current price, BANPU’s shares are at a safe level to ride our long-term investment theme based on the unlocking of value from the listing of BPP and an earnings turnaround driven by BANPU’s power business expansion in 2016-17. Investors can thus get exposure to the power business and gain the assets of the coal operation almost for free.  

 

Investment highlights 

- Superb 3Q15 earnings expected: BANPU will likely post 3Q15 earnings of as much as Bt2.0bn, which implies 10% upside to our 2015 earnings estimate of Bt2.27bn (its 1H15 earnings were only 1% of our full-year estimate), due to: 1) higher production volumes by 1.6mn tons with almost flattish coal prices but a slightly better margin (+Bt750mn); 2) greater contributions from its power business, from both BLCP (+Bt200mn) and the Hongsa power projects (+Bt190m); and 3) a lower derivatives loss and higher FX gain (up to +Bt1.3bn). We maintain our view that 3Q15 earnings will be BANPU’s best of the year. 

 

- Maintain cautious view, but risk to coal supply may boost price in the short term: The approaching rainy seasons in Indonesia and Australia in 4Q15 create potential downside to thermal coal supply from the world’s largest and second-largest coal exporting countries. This combined with an increase in demand for contracted purchases by Japan and Korea during late December to February means it is likely that the coal price will regain some positive momentum over 4Q15-1Q16, although we maintain our cautious long-term view on the thermal coal price outlook due to the downside risk from Chinese and Indian coal imports.  

 

- Listing of BANPU Power to remain in 2Q16. Based on the current operation, a simple PER valuation of the power business indicates a fair price of about Bt19.2 (EPS of Bt1.6 at 12.0x PER) with a range of about Bt18.0-Bt19.8 after the potential dilution of 25% and additional contributions from the Shanxi Luguang power plant. Comparing these valuations to the current share price of BANPU, it means investors may enter BANPU’s power business and gain the assets of the coal operation almost for free. BANPU management confirmed that the listing of BANPU Power on the SET will be completed by 2Q16, about 7-9 months from now. 

 

Valuation 

- Our 12-month target price is maintained at Bt24.7, based on a sum-of-the-parts methodology. We use 0.8x P/BV target for BANPU's coal business to reflect the net loss generated from its coal business and DCF approach for its power business.