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Banpu

Limited downside risk on coal price

Banpu Plc

BUY, TP Bt36/share on more optimistic view for coal price upon a better balance in demand/supply in the global market. There may not be a sharp recovery in coal price but continued control of costs will continue to support profitability this year and next. In addition to attractive upside of 20% to our TP, BANPU offers a dividend yield of 3.3-4.3% over the next three years. Downside risks are further weakening of coal price and unexpected lower coal production.

Price stabilizing in line with more balanced market. Coal price should be fairly stable at current levels with low downside risk as the coal market will be more balanced this year. Added supply is expected at ~33mt against a rise in demand of ~25-37mt. The key suppliers remain Indonesia (+20mt) and Australia (+10mt) with the US and South Africa as swing factors. On the demand side, India will take the lead with additional demand of 12mt from growth in electricity demand and insufficient domestic coal supply. At the same time, demand from India has been affected by the depreciation of the local currency and slower economic activity during the month-long general election just ended. Demand from other regions, including Europe, China and other north Asian countries, is expected to rise by 1-5mt each.

>90% of target volume sold. BANPU’s market is diversified, with China, Japan and Australia (domestic coal) the key markets, accounting for 56% of total 2014 target sales volume of 49.2mt. The company already locked up >90% of this volume both for Indonesian and Australian coal. About 80% of total target volume was priced at or linked to the price index, which we believe should be close to 1Q14 levels.

Better outlook for coal price/demand in the longer term as coal will remain the largest source of energy for power generation, although its share in power generation may decline gradually on carbon emission concerns. Power producers will over time adopt the high efficiency-low emission technology (HELE) as coal cost is competitive and coal reserves remain abundant. Also, with carbon capture and storage (CCS) technology, CO2 emission from coal-fired power plants will be lower than for gas-fired.

Cost reduction continues to help maintain margin in the near term while coal price remains low. Cost control and improved productivity at its Australia coal facility lowered operating costs to A$51/t in 1Q14 from A$52/t in 2013. BANPU plans to cut 2014 operating costs by 3.8% YoY to A$50/t with a target of ~10% productivity improvement. Lower strip ratio at Indonesian mines will help it cope with lower coal prices. Coupled with barging contract renegotiations and fuel substitution, BANPU expects operating cost in Indonesia to fall ~5% YoY in 2014 from ~US$62.8/t in 2013.

2Q14F: slide QoQ due to longwall relocation at Mandalong mine in Australia which will cut coal production for ~4 weeks. There will also be no gain from derivatives. ASP of Indonesian coal is looking to weaken slightly QoQ, in line with the market, though at the same time, downside risk is limited as the current price is below the cash cost of new mines. BANPU will continue to work to reduce operating costs, especially in Indonesia, which could give some small help to gross margin.




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