• Expect solid 3Q18F core earnings (+33% qoq, +24% yoy), driven by sales volume at ITM and CEY; FX loss to drag net profit down 27% qoq to Bt2.9bn (but +42% yoy on higher ASP)
• Healthy demand and tight supply to support coal prices
• OUTPERFORM, rolled over valuation base to FY19F and nudged down SoTP to Bt24 (from Bt28); undemanding valuation helps cushion near-term volatility

Expect 3Q18F earnings at Bt2.9bn, down 27% qoq but up 42% yoy

Coal operations should improve qoq led by strong sales volume at ITM and higher ASP at ITM and CEY. Sales volume should recover to 6.3m tons from 5.3m tons in 2Q18 at ITM but soften to 3.3m tons from 3.8m tons at CEY. CEY changed a long-wall at its largest Mandalong mine (shut for three weeks vs. two weeks in 2Q18). Strong coal prices should lift ASP to US$85 for ITM (US$77.9 in 2Q18) and A$96 for CEY (A$94.4 in 2Q18). Its power subsidiary, BPP, should deliver softened qoq operations due to weaker operations at BLCP (95% EAF vs 100% in 2Q18) and Hongsa (80% EAF vs 82% in 2Q18). Hence, equity income should drop 10% qoq despite improving coal operations in China. As BANPU uses US dollars as functional currency, stronger THB against USD at end quarter should contribute Bt960m FX loss (vs. Bt1.2bn gain in 2Q18). Overall, we expect BANPU to report net profit of Bt2.9bn (Bt0.56/sh), -27% qoq but +42% yoy. Results will be out on 9 Nov.

Healthy demand and tight supply to support coal prices

Coal demand has been strong despite stricter energy policies in many countries. Demand has been driven by Southeast Asia and India where steady economic growth has led to additional coal-fired power plants. India is facing supply deficit, and most of its coal mines are concentrated in the east while demand is largely in coastal areas, making imported coal more competitive. Further, the poor infrastructure limits coal shipment. The Indian government is building railway to transport coal from inland to coastal areas, which would take 3 years to complete. Meanwhile, China’s ban of coal import at small ports since last year has continued to tighten supply in its domestic market.

OUTPERFORM, nudged down TP to Bt24 (from Bt28); undemanding valuation helps cushion near-term volatility

Healthy coal demand should ease market concerns on coal price correction. We revised down our earnings forecast by 14%/2%/4% in FY18-20F to incorporate FX loss and reflect our downward revision of BPP and rolled over our valuation to 2019 to derive SoTP at Bt24.0/sh, implying 9.4x PE. BANPU, along with other commodity stocks, is facing near-term headwind from global volatile market. A US$1/ton increase in ASP would raise BANPU’s earnings by 2%.