Banpu's acquisition of AACI boosts stock value

The Securities Analysts Association said 13 of 14 brokers had updated its research on Banpu's stock this month to recommend "buy" and the other one "neutral" with a target price of Bt518 to Bt648 per share.

Banpu has two core business lines: coal mining and coal-fired power generation. Apart from Thailand, it has made its coal-mining presence felt in Indonesia and China. The company posted a net profit of Bt2.07 billion in this year's first quarter and Bt6.65 billion for all of last year.

Banpu's wholly owned subsidiary BP Overseas Development (BPOD) acquired an additional 78.4-per-cent stake in Asian American Coal (AACI), raising its holding to 100 per cent.

AACI of China owns 56 per cent of Shanxi Asian American-Daning Energy (SAADEC), which is a coal producer with a capacity of 3.1 million tonnes a year (targeted at 4 million tonnes a year) and a coal reserve of 88 million tonnes. AACI also owns 45 per cent of Shanxi Gaohe Energy (SGEC), which is expected to produce 6 million tonnes of coal a year, starting production in 2010 with a 30-year concession and a very large coal reserve of 191 million tonnes. Both SAADEC and SGEC are located in Shanxi province.

Kim Eng Securities (Thailand) is among those recommending "buy" in the consensus, with a fair value of Bt536 a share.

The buyout deal will add fair value to Banpu's stock of about Bt34 a share, assuming that SAADEC's sales volume for coal is 3.6 million tonnes a year over 17 years and SGEC's is 6 million tonnes a year over 30 years.

"However, we'll adjust our expectations of profit and fair value after obtaining more information after an analysts' meeting this week," the broker said.

The current high coal price is another major engine driver for Banpu's share price, the broker said. Last week, coal hit a record high of US$152.45 (Bt5,000) per tonne. It has risen 70 per cent since the start of this year and 168 per cent from the same period last year.

KGI Securities (Thailand) maintains its "outperform" rating on Banpu shares, with a target price of Bt560 apiece.

Banpu expects to benefit from the investment, because it will have more control over determining AACI's future strategy, and the deal will give Banpu the opportunity to invest more in China's coal sector and create additional value for the company in the long term, the broker said.

The deal should benefit Banpu's earnings and target price, because it will realise the two mines on a proportional consolidation basis. This year, the broker believes the recognition of SAADEC's Daning mine will drive Banpu's earnings before interest, tax, depreciation and amortisation up roughly 12.2 per cent from the present forecast. In the longer term, after SGEC's Goahe mine starts operations, Banpu will realise additional earnings from higher sales volume of 6 million tonnes a year, or roughly 30 per cent of this year's target sales volume.

Furthermore, it will have more coal reserves to create value in the long term, as these two mines have a combined coal reserve of 279 million tonnes, which could prolong the life of Banpu's production for the next 20 years, the broker said.

The broker estimated the additional value to Banpu's target price to be Bt35 per share, based on the assumptions of a long-term coal price of $65 a tonne, acquisition costs of $420 million and development costs for the SGEC mine of $300 million.

"Nonetheless, we plan to review our earnings forecast and target price after we get more information from meeting with the company," the broker said.

Phatra Securities said the buyout deal was positive and would add at least Bt18 a share to Banpu's net asset value, from Bt535 apiece to Bt553.

"We're cautious about Banpu in the near term. While its valuation is not demanding, we see higher earnings risk, particularly given high earnings-growth expectations. High oil prices and increasing regulatory risks are our key concerns," the broker said.

Phatra Securities reiterated its "neutral" rating on Banpu shares.

CIMB-GK Securities (Thailand), which is not among the brokers in the SAA consen-sus, has also maintained its "buy" recommendation on Banpu shares, with a target price of Bt600 apiece.

The broker believes the acquisition to be positive, because Banpu's coal reserves will rise significantly. Banpu's current coal reserves are 200 million tonnes, located largely in Indonesia.

"The increase in AACI's stake to 100 per cent will lift Banpu's coal reserves by 106 million tonnes, or 53 per cent of its reserve," the broker reported. "Sales volume should increase another 1.4 million tonnes in 2008 from its Daning mine, or about 7 per cent of this year's output of 20 million tonnes. The Gaohe mine should add 1.06 million tonnes of production in 2011 and 2.11 million tonnes in 2013, or about 10 per cent of Banpu's current coal output."