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BANPU

Transition to recovery

Banpu Plc

Investment thesis

The weak patch in coal prices and the consensus FY14 earnings forecast downgrade will cap the scope for upside to BANPU share price in the near-term. However, we are more positive on its outlook over mid- to long-term. The coal price recovery is on-course, although prices are likely remain under pressure in 1H14. The contribution from CEY will rise and the investment in Hongsa will bear fruit in FY15.

BANPU's earnings will bottom out in 1H14, then gradually improve. As such, its stock underperformance amid the coal price dip will boost the risk-reward proposition—it trades at a PBV of only 0.8x (1SD below its long-term mean and close to its PBV in the wake of the 2008 Wall Street Crash). Incorporating net value accretion from Hongsa and fine-turning for a 5percent share buy-back, we raised our DCF-derived target price to Bt35 from Bt31.50 and upgraded our rating to BUY from HOLD.

Coal prices—soft patch in 1H14 followed by rises in 2H14

Coal prices are now re-testing the lows seen last year. We expected the recent dip, given that a period of seasonally weak demand for thermal coal is approaching and excess production capacity caps the scope for upside to spot coal prices through 1H14. But with improving industry fundamentals on the supply side, we reckon that a sharp contraction is a very unlikely scenario and prices will gradually rise in 2H14. Global seaborne thermal coal demand and supply are becoming more balanced as the industry works through its spare production capacity.

Earnings resilience in the current soft coal price environment

As noted above, we expect BANPU's FY14 earnings to remain under pressure through 1H14, then improve in 2H14. Pegged to MS's NEWC projection of US$84/t, we anticipate a profit recovery for FY14. Under MS's bear-case NEWC scenario of US$77/t (which is close to the current price), BANPU's earnings might be downsized by 16percent from our current forecast, which would put it at a similar level to FY13.

CEY the key booster for FY14

We are upbeat on CEY's outlook for this year after it almost broke even in FY13 due to huge FX losses and a poor operational performance. As production problems and extended long-wall moves at the Mandalong and Springvale Mines were resolved, CEY should achieve deeper cost reductions and greater production this year. Also, 2mt of a total of 9mt in domestic sales are scheduled for re-pricing by mid-year—the first 2mt of re-priced contracts became effective in 2012. Based on a similar pricing regime, we expect a new price of US$74-75/t, up from $48-49/t.

Hongsa re-emerges—net positive value contribution

Despite pending lawsuits, the Hongsa project hasn't been affected—construction work is 77% complete with the first unit due to start operating in 3Q15, the second unit in March 2016 and the third in June 2016. Management guides for a profit (its 40percent stake) of US$70m a year (~30% of BANPU's earnings). Under the worst-case scenario where BANPU loses the case in both the Appeal and Supreme Courts, we still anticipate a net NPV accretion of Bt1.6 to the firm.






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