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BANPU

Passed through the worst already. To revive from now on BUY

Banpu Plc (BANPU)

- To deal with oversupply in coal business

BANPU is currently readjusting its business strategy to deal with coal

oversupply that would continue in the next couple years. In 2014,

worldwide coal supply has increased by 3.9%yoy to 935 million ton (36

million ton from major producers: Australia, Indonesia, Columbia and

South Africa), while demand has grown by only 3.0%yoy to 912 million

ton (mainly from Asia), determining BANPU’s business in the future.

Preliminarily, coal business has passed its worst in 2013, gradually

reviving until Asia’s overall economy makes a solid recovery. BANPU has

decreased its overall production cost by 12.9% of the previous cost to

US$61/ton to keep its profit margin high (versus peers’ average

production cost of US$70/ton). Moreover, BANPU plans to expand its

investment on power business for long-term stability, aiming to increase

the proportion of its income from power business to 35% of total income

(currently 20%).

- Power plants to boost profit in 2014

BANPU’s 4Q13 net profit was B645m, dropping 32%qoq (as we

expected). Share of profit from BLCP fell by 70%qoq on seasonal effect

(annual maintenance shutdown in 4Q), and coal price decreased by the

average of 2%qoq. However, coal sales volume from Indonesia and

Australia grew by 2%qoq and 14%qoq, respectively. Also, 4Q13 Fx gain

was as high as B725m, as BANPU reported its earnings results in US$,

and US$ depreciated in 4Q13. 1Q14 net profit is expected to rebound

qoq, as share of profit from BLCP would resume its production at its full

capacity. Profit from coal business is likely to stay flat as a result of

seasonal effect (rainy season in Indonesia), so 1H14 net profit would be

lower than 2H14. FY2014 normalized profit is expected to grow by

20%yoy, as coal sales volume from Indonesia and Australia would rise

by the average of 3%yoy to 30 million ton and 14.9 million ton,

respectively. Furthermore, production cost is expected to fall by 5%yoy

to US$57/ton.

- "BUY". 2H13 dividend yield is 2.6%

We derive end-2014 fair value at B32/share. We reiterate "BUY". The

price has absorbed negative factors, so BANPU's PBV is as low as 0.8x

(versus the sector’s average PBV of 1.2x). Moreover, 2H13 dividend

yield is 2.6% (B0.70/share; higher than expected). XD date is 10 April,

and dividend will be paid on 29 April 2014. However, Hongsa power

plant court case can be a pressuring factor in the long term. If the court

rules that BANPU loses the case and has to pay a fine of B31bn, the fair

value would decrease around B8-10/share.


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