TRIS Rating affirms the company rating on Banpu PLC (BANPU) and the ratings on its senior unsecured debentures at “A+”. The ratings reflect the company’s leading position in the coal industry in the Asia-Pacific region, diverse customer base and geographic diversification of coal reserves, reliable stream of income from the power segment, and its strategic move to be integrated energy company. However, the ratings are partially offset by the cyclicality of coal prices, slowdown in demand for coal driven in part by efforts to reduce emissions worldwide, as well as uncertainties concerning coal-related policies implemented by the Chinese government.
KEY RATING CONSIDERATIONS
Leading position in coal mining in Asia-Pacific
BANPU is one of the leading coal mining in Asia-Pacific region. BANPU has coal mining operations in Indonesia, Australia, China, and Mongolia. For 2018 operation, BANPU coal sales is expected to reach 45 million tonnes, while its aggregated coal reserves was 563 million tonnes as of September 2018.
BANPU’s coal reserves increased, mainly due to higher coal price assumption. BANPU’s coal reserves in Indonesia and Australia increased to 563 million tonnes as of September 2018, from 519 million tonnes for the same period last year. Reserves at BANPU’s Indonesian mines indicate a reserve life of about 11 years and more than 20 years for the Australian mines. Coal reserves are likely to increase as long as coal prices are strong.
BANPU also has a diversified customer base. Sales volume is targeted at 45 million tonnes in 2018, including sales volume from the Chinese mines. Of the total sales volume, 22% was sold to buyers in China, 20% in Australia, and 14% in Japan. The remaining volume was sold to customers in a number of other countries including Korea, Taiwan, India, Indonesia, the Philippines, and other Southeast Asia countries.
Coal production is expected to increase
BANPU’s coal production from Indonesian and Australian mines is targeted to increase to about 40 million tonnes in 2020, from about 37 million tonnes in 2017. The higher coal price will enable BANPU to increase its stripping ratio, resulting in higher production. In addition, the new coal mine (PT Tepian Indah Sukses -- TIS) with coal reserves of 4.7 million tonnes, acquired in 2017, will start up in late 2019 with production volume of about 1 million tonnes per year. In August 2018, BANPU announced its acquisition of 100% shareholding in PT Nusa Perdana Resources (NPR) with a total investment cost of about US$30 million. This acquisition will add about 77.4 million tonnes of coal reserves. BANPU also plans to commence operation of a new coal mine (NPR) in late 2022 with production volume of about 4 million tonnes per year.
Power segment provides reliable cash flow to BANPU
TRIS Rating views that the investment in the power business has strengthened BANPU’s business profile. This is because the reliable stream of cash flow should help cushion BANPU’s overall performance from the fluctuation in coal price. BANPU has gradually enlarged its power portfolio through Banpu Power PLC (BPP), its subsidiary. Currently, BPP has invested in many power projects in Thailand, the Lao People’s Democratic Republic (Lao PDR), China, and Japan with equity capacity of 2.14 Gigawatts (GW). The power segment has generated earnings before interest, tax, depreciation, and amortization (EBITDA) of about 19% of BANPU’s total EBITDA and dividend of US$64 million for the first nine months of 2018. BPP plans to double its equity capacity to about 4.3 GW in 2025. This target will be achieved by developing solar power projects in Japan and Vietnam, commencing operation of coal-fired power plant in China, investing in wind turbine power in Vietnam, and other investments.
Targeted to be an integrated energy solution company
BANPU’s target to be an integrated energy solutions company will help the company capture new opportunities and offset the slowing pace of demand for coal in the long-term. As part of an integrated energy solution, BANPU acquired 28.86% shareholding in Sunseap Group Pte. Ltd. (Sunseap) in 2017. Sunseap is an energy solutions provider in Singapore, with solutions ranging from rooftop installations to floating photovoltaic (PV) systems. In March 2018, BANPU acquired 44.84% stake in New Resources Technology Pte. Ltd. (NRT) for US$33.2 million. NRT specializes in designing, manufacturing, and integrating of Lithium-Ion batteries for the automotive industry and energy storage systems.
Improving financial profile
The increase in coal price has improved BANPU’s financial profile. BANPU’s average selling price from its Indonesian mines increased by 20% year-on-year (y-o-y) to US$85 per tonne for the first nine months of 2018, in line with the benchmark price. The operating margin (operating incomes as percentage of operating revenues) increased from 16.1% in 2016 to 23.1% for the first nine months of 2018. The higher average selling price plus higher contribution from the gas business helped increase the company’s EBITDA to US$696 million for the first nine months of 2018, from US$507 million for the first nine months of 2017.
The capital structure remained at a satisfactory level. As of September 2018, the company’s adjusted debt was US$3,625 million with a debt to capitalization ratio of 53.38%.
TRIS Rating forecasts BANPU’s EBITDA to increase to approximately US$800-US$900 million per year during 2019-2021. This forecast is based on a sales volume of coal at about 35-40 million tonnes per year from the Indonesian and Australian mines, while the Newcastle Index price is expected to be in the range of US$90-US$100 per tonne in 2019-2021.
BANPU budgets capital expenditures and investment of US$200-US$300 million per year in 2019-2021. Given the planned capital expenditures and investment and estimated EBITDA, debt to capitalization ratio is expected to stay below 55%. The EBITDA interest coverage ratio is expected to hover around 6-7 times and the FFO to debt ratio will range from 15%-20% in 2019- 2021.
RATING OUTLOOK
The “stable” outlook reflects the expectation that BANPU will maintain its leading position in the coal industry. Dividends from the steady and stable power segment will provide some cushion for the company. Good liquidity, underpinned by BANPU’s financial discipline, prudent cash management, plus financial flexibility, will help BANPU weather the volatility in the market conditions.
RATING SENSITIVITIES
An upside for BANPU’s ratings may occur if the company could improve its financial profile significantly or exhibit more earnings stability. A rating downgrade will emerge if coal prices tumble and cash flow substantially weakens below expectation. Any debt-funded investments, which could worsen the capital structure and deteriorate cash flow protection for an extended period, would be another factor supporting a downgrade.
COMPANY OVERVIEW
BANPU is one of the major energy companies in Asia. It was established in 1983 to mine coal in Thailand. Currently, BANPU has coal operations in Indonesia, Australia, China, and Mongolia. The Indonesian operation remains the major profit contributor. For the first nine months of 2018, the Indonesian coal operation accounted for 42% of BANPU’s EBITDA. The Australian and Chinese coal operations accounted for 19% and 11%, respectively. The rest came from power businesses in China, Thailand and Japan (19%), and its gas business in the United States (9%).
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2098-3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2018, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.