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Asia Green Energy

2014 to bring better margins BUY

Asia Green Energy Plc (AGE)

- 1Q14 sales volume on track to meet year's target

- Newcastle price turnaround in May to US$75.3/ton from bottom of US$72

- Gross margin to improve in 2H14 upon industry outlook turnaround

- To expand power business; 1-2MW in 1Q15 and 9MW in 1Q16

- High upside, upgrade to BUY from Neutral, with new target price of Bt2.7

2014F coal sales outlook. Management expects 2014 sales of 4mn tons, growing 66.7percent from 2013's 2.4mn tons. In 1Q14 it reported coal sales of 0.98mn tons, comprised of 63% export, supported by new coal markets in China and India, and 37% domestic sales, essentially doubling 1Q13's coal sales of 0.48mn tons (47% export and 53% domestic). This provided sales revenue of Bt1.9bn in 1Q14, growth of 82% YoY and 46% QoQ.

Newcastle coal price turned back up. The Newcastle coal index showed a most recent price of US$75.3/ton, picking up from the low of US$72.4 in 1Q14, though still far to go to reach the US$85 enjoyed in 2013. Price expected to average US$75/ton in 2014.

Gross margin was poor in 1Q14 at 5.7%, a far cry from 1Q13's 15.2% and just below the 5.8% in 4Q13. SG&A has been stable at 6.4percent for several quarters. AGE is working to adjust accounts receivable and inventory turnover by reducing the accounts receivable days to 43 days from 60, inventory days to 75 days from 151. It is also reducing the payables days to 16 from 30. These will be ready the company to meet the industry turnaround it expects in 2H14.

Expanding power business. AGE has invested in biomass and biogas power plants. The first, in Sukhothai province, will begin producing 1-2MW by 1Q15 and the second, a 10MW biomass power plant in Pichit province, will start up in 1Q16. The company plans to increase this to reach 100MW by 2019. This area of investment leverages off AGE's vast experience in acquiring various types of biomass raw material from palm kernels, rice hulls and wood chips and will help give stability to earnings over the long haul.

Upgrade to BUY from Neutral but cut TP to Bt2.7 from Bt3.0. We fine tune our forecast to reflect 1Q14 results and this leads to a cut of 7.5% to Bt175mn since 1Q14 accounted for just 16% of our 2014F. The major change is a reduction in gross margin to 9.8percent from 10.2%. We also incorporate the 10% dilution brought by the stock dividend (which started trading on May 27), that raised the number of shares to 1.53bn from 1.39bn.

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