BANPU

Aim to minimize cost to ease effects on profit from weakened selling price HOLD

BANPU Plc



Move forward with strategy of cost minimizing to sustain gross margin

BANPU still has stepped forward with the short-term strategy during the

weakness of coal price which aims to keep the production cost at minimum to

sustain the company's gross profit margin at a high level. This strategy

includes getting the land stripped to shallower level (decreasing the stripping

ratio), expanding the coal production capacity in mines with high-quality coal,

and investing in the infrastructure systems (especially both land and sea

transportation) in Australia's coal mines. For the gross margins of coal

businesses in Indonesia and Australia, they're assigned at 40% and 32%

respectively. For the coal sales volume in 2013, BANPU aims to increase its

sales volume to 48 million tons or 9% YoY increase (29 million tons from

Indonesia, 15 million tons from Australia, and 4 million tons from China). At

present, the company has made a forward contract for sales volume in 2013 by

44%, projected to gradually increase in early-2013. For the global coal price in

2013, it is projected by the management to stand at around US$95-100/ton on

average (based on BJI, currently at US$93.35/ton) because the demand for

coal in China is still high. In 2012, China had imported 170 million tons of coal,

so the coal price is likely to recover during 2H13. In terms of BANPU's purchase

of new coal mines, the company's cash flow is enough for investment in new

projects; however, this might not happen in the near future since BANPU has to

develop its mines under the current operation for full efficiency first. In regard

to the Hongsa case, BANPU is now at the appealing process which would take

3-4 years for the judgment to be made.



BLCP's resumption of operation to boost 1Q13 profit from 4Q12

BANPU's 1Q13 profit is projected to increase from 4Q12 due to the profit

sharing from BLCP (50percent stake held by BANPU) which has resumed full

operation in 4Q12 after 40 days of annual maintenance shutdown. However,

the profit from coal business tends to decline as a result of the average selling

price of coal that has dropped along with BJI coal index. During 2H13, the

profit from coal business is projected to recover because the price and sales

volume would increase compared with 1H13. Nevertheless, the company's

FY2013 profit is projected to decrease by 15.8% YoY due to the average selling

price of coal which is projected to descend by 11.1% YoY to US$80-85/ton

(stepping over benefits from the mentioned coal sales volume in 2013).

Reiterate "HOLD"… semiannual dividend yield is 2.3%

The fair value, using DCF, at end-2013 stands at B492.48/share. We reiterate

our recommendation of "HOLD" because there might not be positive

fundamental factors in 1-3 months ahead. Considering long-term

fundamentals; however, the overall look of coal industry has a limited

downside because the current coal price is getting close to the production cost

of entrepreneurs in many countries, so the supply is likely to decrease because

the coal production might be no longer worthy. Accordingly, the recovery of

coal selling price is projected to be seen once again in 2H13. In addition,

BANPU has announced to pay 2H12 dividend yield at B9/share or 2.3%

(semiannually).