BanPu (18). A misunderstood asset play and working towards converting these assets
BANPU, a misunderstood Asset Play.
A few weeks ago I spent the whole afternoon at Quest Fund Management talking about Banpu. This stock was then trading around 27 Baht per share and Quest Fund calls it a "strong value buy". When I told them I favor high dividend plays they asked: How about a misunderstood asset play and working towards converting these assets to revenues.
Fine, I answered let’s review it. The senior analyst then proceeded in an articulate way explaining how this company has a lot of hidden assets and how most analysts do not understand Banpu’s complex balance sheet. Quest estimate that the net asset value of Banpu is close to 87 Baht per share. Since oil prices have been on the increase lately this could even be conservative, as Coal is an inferior but nevertheless substitute to oil.
Quest Management also much likes RCL (35) Regional Container Lines. This is a good value pick in the transportation sector and a far more reputable company in my opinion, than the other guy called Precious Shipping.
The stated book value over 80 Baht per share, the company is benefiting from increased regional trade and is rapidly paying off its dept.
Both Banpu and RCL are new purchase recommendations.
But today we look at Banpu:
"One thing is very clear, earnings are set to surge in 2001 as both Coco and Tri Energy begin contributing to the bottom line and coal sales from Indonesia reach their peak.". From Asset Plus.
They key with Banpu is in having a very professional person understand their balance sheet. I think Quest did the hard work and so I was convinced this stock could rise in value substantial as we get closer to year 2001. Quest fund owns a lot of Banpu at substantially higher cost then currently.
I note that Tisco Securities also has a buy on BANPU and here is what one seasoned subscriber whom I gotten to respect over the years just wrote me:
Unfortunately, my knowledge of the energy industry is pretty-much confined to oil and gas. Given my lack of familiarity with BANPU, I"m not qualified to comment, but will make a couple of observations anyway.
Competition with natural gas may be a consideration for BANPU’s coal business. It seems like every few months I see an article in the industry press about a natural gas discovery or development in Thailand, and I get the impression that there’s a surplus of natural gas in Thailand. Capital costs associated with power generation from natural gas are low, and natural gas is a much cleaner-burning fuel than coal. (Natural gas is better for the environment.) Here in the U.S., the majority of new power generation is from natural gas, even though the U.S. is the "OPEC" of coal -- there’s an overabundance of coal in the U.S.
In the U.S. and coal-exporting countries, the coal mining business has had a very tough time over the last 15 years. Returns for companies have been low, because of over-abundance of the mineral and competition from other fuel sources.
Coal however did well back around 1980, when the price of oil was very high. This said, I notice that people who know about 1000 times more about energy in Thailand than me are forecasting substantial increases in demand for coal in Thailand, as a result of new coal-fired projects. Sukit, the analyst at TISCO who wrote a large report on BANPU recently, is bright, thorough, and honest, and liked the stock at 25.50 Baht/share. I notice that TISCO Finance holds 3.4% of the company. Given that Sukit wrote the report, though, this conflict doesn"t cause me a lot of concern.
The report got my attention, but given the debt and that Sukit was forecasting a PE of 5.7 in 2002, I decided I didn"t want to take a close look at the company, given that there are companies out there with cleaner balance sheets and good growth prospects that are cheaper on a PE basis and that are easier to understand.
I haven"t spent over 1 hour looking at this company, so please take this with a grain of salt".
Quest answers that Tisco is much too conservative and does not fully understand the complex Banpu story. Quest very much stands to their buy recommendation and note that the Energy sector as a whole has been sold off to horrific levels recently. Banpu is part of the SET 50 index, and these have been sold off most.
In better understanding Banpu.
First, according to Wright Analysis:
Banpu Public Company Limited comprises two major business group, Coal and Minerals Business and Power Business and a supporting unit, the Corporate Strategy and Development. Coal and Minerals produces coal and minerals such as kaolin and ball clay, which are major raw materials for making ceramic products, and calcium carbonate, which is used as raw material for paper and paint production. Power Business generates electricity using steam. It comprises The Cogeneration Public Company Limited (COCO), Tri Energy Company Limited (TECO), and BLCP Power Limited (BLCP). The Group also provides other services including the removal of overburden. Coals and minerals accounted for 63% of fiscal 1999 revenues; engineering services, 35% and logistic and transportation, 2%.
You can see Wright’s full research here:
http://profiles.wisi.com/profiles/scripts/corpinfo.asp?cusip=C76457540
And you can see BanPu’s own web page at:
Banpu owns 32% of Coco and 5% of ATC. Banpu not long ago completed a rights issue and so has some 5 Baht per share in cash. (Close to 1 Billion Baht).
Coco is:
Type of Business & Operation : The Cogeneration Public Company Limited (COCO) is a joint venture company between Banpu Public Co., Ltd. (BANPU) and Noridc Power Invest Anti- Bolac Public Co., Ltd. (NPI) engaged in design of power plant construction and electricity generation in Nordic countries. COCO’s business is to generate electricity in a cogeneration system to distribute to industrial plants in the Mab Ta Pud Industrial Estate in Rayong. Its major products comprise electricity and steam power and minor products include water for industrial usage such as clarified water and demineralized water.
ATC is:
Type of Business & Operation: The Aromatics (Thailand) Public Co., Ltd. (ATC) manufactured aromatics used in petrochemical industry. The company’s products comprised: - Main product: benzene, toluene, paraxylene, orthoxylene, mixed xylene. - By-products: light naphtha, raffinate, liquid petroleum gas (LPG), hydrogen-rich gas, condensate residue, heavy aromatics.
From Banpu’s web page’s introduction:
Banpu Public Company Limited is recently the largest private sector coal mining company in Thailand. The core businesses of the company and its group started with coal mining in the North and industrial minerals mining in the south.
The experience earned from large mining operation has broaden the business into the 10-year contract of removal of over burden and lignite extraction for EGAT (Electricity Generating Authority of Thailand). In addition, the Banpu expands its networks to overseas business. Coal production and Calcium carbonate mining has been conducted in Indonesia and the product respectively. The products from two sites will be distributed to all customers in the Asian region. Within the high demand growth of electricity, which is a basic need of industrial sector, Banpu has diversified its business to enter power sector.
The cogeneration plant producing steam and electricity supplied to the Map Ta Phut Industrial Estate and EGAT is the first step of the company. In 1995, the company performed a great movement in entering the EGAT’s IPP program of EGAT and was
nominated to develop the 2 power projects with the total capacity of 2,100 MW. Banpu Public Company Limited was born as a small coal mining. Within a decade, it has become a largest coal producer in Thailand and one of the biggest Thai player in power business. The perfect combination among its flexible management, strong supportive finance, and effective management team and staffs yield a satisfactory success.
Key points from Asset Plus:
Banpu PCL (BANPU) is a classic case of a company whose share price trades at a substantial discount to its NAV because 1. It is poorly understood, 2. Many believe that the intrinsic value in the assets is not realizable.
We calculate that the commencement of several ventures will contribute to at least a two fold increase in the bottom line as of 2001. One thing is very clear; earnings are set to surge in 2001 as both COCO and Tri Energy begin contributing to the bottom line and coal sales from Indonesia reach their peak. Clearly, Banpu is on the verge of realizing the value on many of its assets and no longer deserves to trade at current levels. We would also argue that there is considerable value in the BLCP land situated in Map Ta Phut Industrial Estate.
Coal operations
Banpu operates two domestic coal mines in Lamphun and Lampang provinces with an annual capacity of 3.0 million tons. Domestic reserves are currently about 18.0 mn tons. However, the Lamphun mine will be depleted by FY2004 leaving domestic production capacity of only 1.5mn per annum.
In early 1999, the company began operating a mine (95 % owned) in Kalimantan, Indonesia (Jurong). Although the annual output of the mine was initially 350 000 tons, it is expected to reach nearly 3.0 Mn tons by FY202. The mine has 48.8 Mn tons of coal reserves.
Banpu is also in the process of exploring new mine sites in Sumatra, Indonesia. The company already possesses mining licenses for one mine and is studying the possibility of acquiring several smaller sites. In total, the company believes these mines have reserves of about 20.0 Mn tons though exploitation of these assets is not expected until FY2002 at the earliest.
At present, Banpu sells its entire domestic capacity to the local market. Cement companies account for the bulk of the take up (60 %) while EGAT and other power/steam industries account for the remainder. Domestic coal prices are calculated using local diesel oil prices and the minimum wage as benchmark. Currently prices are about $ 12 per ton. Banpu’s average gross margin in domestic coal ranges between 58 - 62 %.
Approximately 60 % of Jurong’s annual production will be exported back to Thailand to service demand from local industries and new power producers. The rest will be exported to international markets such as India and Taiwan. Pricing is dependent on the international markets and subject to transport costs. The Japanese Benchmark Price (JBP), which is based on a heating value of 6 000 Kcal, is used to determine sales prices.
Currently, Banpu sells its Jurong coal domestically at about $ 23 per ton, a slight discount to the JBP because of its lower heating value (5400 Kcal) and some discounting to gain market share. International sales prices do not include discounting and are about $ 25 per ton. Gross margins average 30 %. Banpu also buys approximately 100 000 tons of coal from other Indonesian suppliers at JBP to cover shortfalls and supply overseas markets. Margins are thin at 7-8 %.
The National Energy Policy Office (NEPO) projects that domestic demand for coal will more than double to approximately 14.0 Mn tons over the next five years as Small Power Producers (SPP) and Independent Power Producers (IPP) commence.
Demand from cement companies and steam related industries (i.e. pulp and paper mills) should also increase as economic conditions improve and commodity demand improves. Banpu accounts for about a 50 % domestic market share and has long term supply contracts with most of its customers.
Industrial Minerals
In addition to its coal mining operations, Banpu also produces Kaolin (used in ceramic, paint and paper industries), Ball Clay (used by the ceramics industry) and Calcium Carbonate). Although it produces 40 000 tons of kaolin and 30 000 tons of Calcium Carbonate per annum these operations accounts for no more than 3-5 % of consolidated revenue or approximately Bt 150 mn.
The company was also chosen to build and administer the A5 terminal at Laem Chabang. The port project has a concession life of 25 years, from May 1996, and operates under lease and profit sharing arrangement. Revenue contribution is approximately Bt 120 mn per annum. FY1999 was the first year of operation.
Soil Removal
Banpu provides overburden and lignite removal at the Mae Moh Mine in Lampang to EGST (Phase 3). The contract period is for 10 years, is valued at Bt 11 527 mn and expires in September 2001. The contract now provides about 25 % of Banpu’s consolidated revenues. In addition as the original contract was based on a rate of US $ 1 per cubic meter of removal, the company has been operating at a negative margin over the last two years given higher depreciation charges of fixed Dollar based assets (operating costs are about Bt 15 per ton).
Phase 5 of EGAT’s topsoil removal contract is now up for bidding with the results expected sometime in 2000. The project size is similar to phase 3 with about 40 mn tons of removal to be done over 10 years. Management is fairly confident that Banpu will win the bid given that it is the only company bidding that currently owns the necessary machinery. In addition the machinery is fully depreciated and has 20 years of useful life remaining.
Therefore, Banpu can undercut all other bidders. Other bidders include Italian-Thai (ITD), Nawarat Patanakarn (NWR) and Sahacon Construction. Of these, only the latter has performed topsoil removal for EGAT and its equipment is reported to be over 30 years old. Banpu’s equipment is just 8 years old and it would only cost about US$ 20 Mn to recondition it. Other contractors would have to purchase specialized equipment worth US$ 140 Mn or more.
Banpu estimates that the minimum bid price would be Bt45 per ton given the costs associated with equipment purchase. At just Bt 40 per ton we estimate that Banpu would book revenues of up to Bt 1.6 bn per annum and get a gross margin as high as 60 % in the beginning of the contract period. This is based on a marginal cost of production of Bt 15 per ton (equal to Phase 3) and an initial depreciation charge of just US$ 1 Mn per annum (the additional US$ 10 Mn to be spent later in the project). Should Banpu loose the contract, management believes that it can sell its fixed assets to the winner up to Bt 2.5bn.
COCO
Banpu currently holds a 32.07 % stake in The Cogeneration Plc. (COCO). However, it just recently sold an option to Sithe Pacific Holdings (33.62 % shareholder) to purchase a further 22.07 % stake. The option price is US$ 10 mn, the terms are one year and the transaction price is Bt 22 per share (net of transaction cost and capital gains). Whatever happens, Banpu comes out ahead. Bt 22 is a substantial premium to the current share price of just Bt 18; Banpu’s holding cost of Bt 10 and an NPV of no more than BT 15 per share.
Should Slithe not buy the stake, Banpu is US$ 10 mn richer and still owns a profit-contributing asset. Acquisition of the stake by Slithe will also convince Phase 2 creditors to drop their demands for a sinking fund for the put option on its US$ 120mn ECD. The shareholder agreement would otherwise require Banpu to inject 1.8 bn.
Whatever happens, we project that COCO will generate earnings of at least Bt 600 Mn in FY2000 and Bt 1.3 bn thereafter with the completion of Phase 3 bringing capacity up to 815MWH and 930 tons of steam. Even with a 10 % stake, this would lead to a considerable profit contribution to Banpu.
Tri Energy
Banpu owns a 37.5 % stake in Tri Energy (TECO) which is a joint venture with Texaco and Edison Mission Energy to build and operate a 734 MWH gas-fired power plant (IPP) in Ratchaburi province. The plant is expected to begin commercial operation in June 2000 and will sell all of its power to EGAT under a power purchase agreement. We expect the project to contribute at least Bt 257 Mn per annum in revenue to Banpu as of FY2001 based on a price per Bt 1.4 per MWH. Note that this is a conservative estimate and that management expects to book at least a Bt 400 Mn per annum contribution from TECO.
BLCP
BLCP Power Limited (BLCP) is a joint venture with PowerGen Holdings BV and Loxley Energy to build and operate a 1 400 MWH coal fired power plant (IPP) in Map Ta Phut Industrial Estate, Rayong. Because of weaker than anticipated power demand owing to Thailand’s economic crisis, EGAT has reached an agreement for BLCP to defer power delivery to the national grid for at least three years until October 2005.
Recent news reports on Banpu:
February 14, 2000 Banpu’s latest: Management Review
In the second quarter ended December 31st, 1999, coal consumption in Thailand is 17% lower than the Company’s estimation. Less in volume is mostly derived from domestic consumption resulting from lower cement production at the end of the year. Meanwhile, the customer has performed trial use of Petroleum Coke (Pet-Coke) which is a new type of fuel with high heating value and sulfur content. Furthermore, the power plant that belongs to Associated Company has postponed its commissioning and causes the delay in receiving coal.
There was a higher growth in terms of sales revenue, however gross profit growth was yielding a lower growth rate as a result of a) higher portion of imported coal sales, b) higher cost of production from Indonesian Coal Mine Operation due to initial stage of production, and c) the Company is penetrating new market in the region.
According to the Company’s forecast, our Indonesian Coal Mine Operation will have higher contribution in the second half of the fiscal year. As for the strategies to sell more coal in the international market by utilizing existing capacity at the Indonesian mine, the Company has arranged facilities to assure the readiness for both production and management.
Nevertheless, sales for Thailand market is also expect to increase, as the power plant that belongs to Associated Company will resume operation and start receiving coal according to the contracted volume by the third quarter (Jan-Mar, 2000)
In terms of financial policy, the Company has carried out financial activities according to its long-term financial plan. The Baht debentures of 2,000 million was issued in November 1999. Such proceeds were utilized in repayment of the foreign currency loan to reduce foreign currency risk. Consequently, the Company’s net debt to equity ratio has increased slightly from 1.03:1 to 1.2:1. However, the Company will receive new proceeds from its right offerings in January 2000 in the amount of Baht 1,048 million.
Attached to the right offerings are 104.8 million units of warrants eligible for exercise in January 2003 at 33.88 Baht per share. At completion of the long-term financial plan, the Company’s net debt to equity ratio will be lower than 1:1 as expected. The warrants will also be traded in the Stock Exchange of Thailand by February 2000.
The Company’s prospects will still be focusing on energy and gives priority to minimizing business and financial risks as well as increase profitability. In the subsequent quarters, revenue contribution from minerals project, logistics project and other services will be on an increasing trend, which clearly demonstrated in the past quarter. The Company will utilize higher production capacity to generate more revenues and profit from those businesses.
From their latest posted Press Statement Feb 14th "2000:
Group President also announced the 1st half’s performance. Banpu’s consolidated sale revenues were Baht 2,118 million, an increase of 27.45 % from the same period last year. Of which, Baht 1,318 million or 62 % came from coal sales, Baht 575 million or 27 % came from EGAT overburden removal service, Baht 106 million came from port handling services and the rest of Baht 56 million was from other services.
Though the total revenues of the 1st half increased as targeted, at the same time, however, the Company realized the redemption premium of Euro Convertible Bond Series 1 of Baht 156 million as financial expenses and million 180 Baht loss on foreign exchange. In the 1st half, consequently, the Company reported net loss of Baht 308 million, or 2.94 Baht per share. However, total revenues and profits of 2nd half are expected to be higher as the utilizing rate of production capacity increase.
Banpu, during the period of time, succeeded its several financial activities as part of its long-term financial plan. Such those were a redemption of Euro Convertible Debenture Series 1 worth million 476 Baht in August 1999, a private placement of Unsecured Senior Debenture worth Billion 2 Baht in November 1999, and a capital increase of Baht 1,048 million in January 2000.
The Company has reduced its foreign debt by USD 48 million in the 1st half and, currently carried the outstanding foreign debt of USD 88 million. The financial activities, not only reduces the exposure of foreign exchange rate risk but also minimizes the cost of fund, lays the Company the appropriate and flexible
financial structure. The current debt/equity ratio is 1.3:1 and will be maintained at about 1:1 within the 2nd half".
Banpu, Thai Coal Miner, Says Profit Fell 2.5% in Latest Quarter
Bangkok, Feb. 15 (Bloomberg) -- Banpu Pcl, Thailand’s largest coal miner, said profit fell 2.5 percent in the three months to December as sales declined and margins narrowed.
The company reported net profit of 707 million baht ($19 million) or 6.74 baht per share, compared to 725 million baht, or 11.9 baht per share, in the same quarter a year earlier. The results included a currency translation gain of 401 million baht.
Sales fell 5 percent to 891 million baht. Gross margin narrowed to 21 percent from 30 percent as lower-margin coal sales from Indonesian mines increased. Operating profit tumbled 56 percent to 34 million baht. Banpu is expected to fare better in the current quarter. President Chanin Vongkusolkit last month said the company plans to double its coal production to 6 million tons this year as economic recovery in Thailand and other countries in the region spurs demand.
About two-thirds of the new production will supply domestic clients such as cement and steel companies, while the rest will be exported to countries including South Korea, India and the Philippines.
Thailand to Compensate Banpu for Higher Mining Costs, Post Says
Bangkok, Feb. 28 (Bloomberg) -- Banpu Pcl, Thailand’s largest coal miner, and hiangmai Construction Co. will receive 2.5 billion baht ($66 million) from the Electricity Generating Authority as compensation for the increased costs of operating a lignite mine in Lampang, the Bangkok Post reported, citing Chuyos Sutharattanachaiporn, an EGAT superviser.
The two companies, which said their production costs under the 11-year contract rose 25 percent as the devaluation of the baht in 1997 made imported machinery more expensive, had asked for 5 billion baht in compensation. The original contract called for each company to be paid 20 billion baht per year from 1990 to 2001, the paper said.
Banpu, which has two domestic mines and one in Indonesia, also owns stakes in three power plant projects in Thailand. (Bangkok Post, 2/28/00, Pg. 3)
Best Personal Regards to all ourSsubscribers,
Paul A. Renaudwww.thaistocks.com
PS.Here You can see all Seamico’s late "99 research reports.
