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Banpu Plc

4Q13F: Lower earnings from power business BUY

Banpu Plc

4Q13F: expect QoQ fall. Net profit in 4Q13F is estimated at Bt790mn, down 17% QoQ and 74% YoY, with lower recurring profit QoQ due to small profit contribution from its power business in Thailand, i.e. its 50% interest in BLCP, whose plant was idled in the last two months of the year after meeting contracted available hours in late October. We expect coal profit to be flat QoQ as higher sales volume (+5.4% QoQ) was offset by lower ASP (-1% QoQ), mainly at Indonesian mines, and the usual higher SG&A in the last quarter of the year. This will, however, be aided by an FX gain of ~Bt400mn from the Bt10bn Thai baht bond. We expect the company to report results on 18 Feb.

Good coal production in 4Q13F. Coal production at Indonesian and Australian mines was good in 4Q13F, with a rise in coal sales volume of 5.4% QoQ to 11.3mt, 7.6mt from Indonesia (+1.6% QoQ) and 3.7mt from Australia (+15.3% QoQ). The far stronger sales volume from Australian coal mines was off the 3Q13 shutdown for longwall relocation.

Selling price of Indonesian coal still down in 4Q13F. Management said average selling price for Indonesian coal continued to slip QoQ by ~US$1/t to ~US$71/t+ while ASP of Australian coal was flat QoQ at ~A$71/t. Nonetheless, gross margin for coal was stable at 35-36%, as operating costs were also trimmed. The 2013 ASP for Indonesian coal is estimated at ~US$75/t, down from US$91.2/t in 2012. ASP could fall further in 2014F because of the weak coal price in 2H13 when it started to lock in selling prices for this year's shipments. The company has fixed 30% of its coal for 2014F at US$72/t plus 20% linked to the coal price index.

Coal price could bottom out. Management is more positive on coal price outlook, with demand growth at 2-3% p.a. globally and 4-5% p.a. in Asia, mainly from new power plants in Korea and India. Meanwhile, pressure from the supply side will subside gradually due to more supply cutbacks, especially in China, plus some in Australia. Currently, there remains a 60-70mt surplus in the global market, mainly in Asia. BANPU expects coal demand/supply to be balanced again in 2016-17.

2014F outlook. With coal production flat YoY in 2014F and coal price still heading down, BANPU will continue to reduce operating costs. Management says operating costs in Indonesia could be trimmed another ~US$3/t from US$60/t in 2013 by reducing the stripping ratio by 0.5-1x; operating costs are already well down from US$67/t in 2012. In addition, about 2mt of the legacy coal contracts in Australia will be re-priced in mid-2014 from A$47-48/t to A$70+/t.

TP Bt36, BUY reaffirmed. We maintain our DCF-based TP of Bt36/share, which offers 27% upside potential from current share price. We maintain our BUY as upside to our TP is attractive, as are the estimated dividend yields of ~3.7-4.1percent for the next three years. Downside risks are further weakening of coal price and further reduction of its strip ratio that will affect its coal reserves.

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