BANPU - 1Q12 the nadir

(BUY/Target Price Bt700.00)

Investment thesis: Given expectations of weak 1Q12 numbers, the stock will continue underperforming the SET until the market regains confidence in BANPU

Investment thesis: Given expectations of weak 1Q12 numbers, the stock will continue underperforming the SET until the market regains confidence in BANPU’s earnings prospects or the coal price starts taking off (which we anticipate by late 2Q12). But the 20% share price retreat during the past two months has already priced in that weakness. In order to reflect our earnings forecast cut, we have downgraded our YE12 target price to Bt700 from Bt770. Our BUY rating stands, premised on good medium-term prospects for coal prices and a buoyant profit outlook.

Forecasts cut—but earnings uptrend still intact: We have cut our FY12-13 profit projections by 7% and 15%, respectively, to Bt13,684m and Bt14,806m, to fine-tune for MS’s revised Newcastle Coal Index (NEWC) of US$115/t for 2012 (from US$119/t previously). We have also factored in withholding taxes on dividends from CEY (15%) and ITMG (10%)—the firm realized Bt700m last year. Despite a lower NEWC, we remain positive about BANPU’s FY12 earnings outlook—core profit expansion of 14% YoY, buoyed by volume growth and a higher ASP.

1Q12 the nadir … We expect 1Q12 net earnings of Bt2,179m, down by 38% QoQ and 76% YoY. Stripping out extra gains, profit would be down 19% QoQ but flattish YoY. Weak ITMG numbers are responsible for the QoQ decline. Rainy season in Indonesia and higher diesel costs hit hard on ITMG. As such, we estimate BANPU’s sales tonnage at 5.7mt (7.2mt in 4Q11) and GM at 49% (52% in 4Q11). On the flipside, CEY’s performance should have improved on a higher ASP (US$74/t versus $73/t) and sales tonnage (3.5mt versus 3.4mt). Furthermore, BLCP’s restart would have added to 1Q12 profit. 

…earnings uptrend in 2Q12, and … Despite the weak expected 1Q12 numbers, we are optimistic about the 2Q12 outlook. BLCP’s contribution will peak on increased dispatching to EGAT. CEY should post better sales tonnages than originally planned, due to shipments deferred from 1Q12. Moreover, ITMG’s ASP is forecast to rise to US$102-103/t from $101/t in 1Q12. We also see scope for upside to earnings from Hebi—management is negotiating with industrial clients to raise the sales price further from the current RMB550/t.

…2H12 > 1H12: In our view, the prospects for 2H12 are even stronger. Profit growth will be driven by broad recoveries at ITMG, CEY and at coal assets in China. During Indonesian dry season, the firm usually reports much higher sales tonnages than in the first-half of the year. We expect a greater contribution by CEY, as its sales volume will peak (no long-wall moves are planned for 3Q12) and the effect of re-pricing will boost ASP further. In China, the Goahe Mine should ramp up its output after it obtains a production license, expected by June or July.