Indocoal production lifts 2002 earnings

Banpu Plc (BANPU) announced full-year 2002 earnings of Bt1,449mn, up 85% yoy. Revenues surged 101% from Bt5,415mn to Bt10,909mn due to contributions from Indocoal, which was acquired in March 2002.

Recently, BANPU announced that it had increased its stake in one of Indocoal companies – PT. Indominco Mandiri (Indominco) from 65% to 100%. The remaining 35% was purchased from PT. Indomix Perkasa (Indomix) for $10.5mn. This has added about 16 million tonnes of coal reserves attributable to BANPU.

We are rather disappointed with the company's 4Q02 operational results, however. Gross margins dropped from 26% in 3Q02 to 22% due to excess moisture in its coal, which has forced to company to sell at a discount.

We aren't expecting to see much of a recovery in the company's operating performance in 1Q03 despite the slight rebound in spot coal prices. TECO has shutdown one of gas turbine generators for 27 days due to the damage in the compressor blades. However, this unit was put back on line on 28 February.

The company targets an 11% increase in coal sales this year to 15 million tonnes, with most of the increase coming from the Indocoal mines. As of December 2002, BANPU had total reserves of 180 million tonnes and total resources of 139 million tonnes, compared to 79 million tonnes of reserves before the acquisition of Indocoal.

The company's gearing at the end of December 2002 was 1.2x. The company expects to further reduce its gearing ratio to 1x at the end of 1Q03 due to the Bt1.6bn raised from the 46% of its warrants (BANPU-W2) converted into common shares in January 2003. This capital and the Bt3bn raised from the amortizing debenture issued in February (2.95% coupon rate) will be used to inject capital into BLCP and refinance Indominco's convertible debentures and long-term loans totaling $80mn. By reducing Indominco’s interest rate from LIBOR +1.9% to only 2.95%, we believe the company will save interest costs of around Bt54mn over a four-year period.

We have revised our 2003 and 2004 earnings projections down 12% and 17%, respectively, due to the slower than expected recovery in coal prices. However, the current share price is still cheap trading at 2003 PER of 7.7x and EV/EBITDA of 7.6x. Additionally, we still expect the company to pay a dividend of Bt1 from 2H02 earnings after paying a Bt1.50 interim dividend. These two dividends represent an annualised yield of 6.4%. Since the stock is trading at a 13% discount to our fair value estimate of Bt45, we are maintaining our BUY recommendations.