LW Bogdanka: From bust to boom?
We upgrade Bogdanka from NEUTRAL to BUY with a FV of PLN 66.29 (down from PLN 70.87) mainly on an aggressive bet that global thermal coal prices’ stellar performance will eventually transfer to Bogdanka’s realized prices. Currently, the ARA Index is trading at an almost 20% premium to Poland’s coal price index PSCMI1, which in turn is 17% higher than the estimated 2Q18 realized price in Bogdanka, a situation with no precedent in history. We believe that global thermal coal prices will remain strong on supply constraints in the next half of the year, supported by strong demand, especially in Asia. We also think that the PSCMI1 Index will follow global prices as PGG, the biggest coal mining company in Poland and a marginal producer at the same time, does not generate enough cash to cover investment expenditures to restore production capacity. We also think that even though there is a current agreement on a pay rise between PGG’s Board and trade unions (7% pay rise) for 2018-2019, employees might not miss the chance to use next year’s parliamentary elections as leverage in a fight for other concessions which would require higher coal prices to cover additional cash outflow. Last but not least, we believe Bogdanka and Enea’s negotiations will have to take into consideration market price to comply with transfer prices and not expose the company to legal risk, hence we forecast a 10% price hike in 2019. On our numbers, LWB trades at a low 19E/20E EVEBITDA of 2.2/1.8, at a ca. 64%/70% discount to international coal peers which we find unwarranted.Lubelski Wegiel Bogdanka is a hard coal manufacturing group based in Poland. Co.'s core business activities are mining and agglomeration of hard coal. The energetic coal sold by Co. is used mainly for the generation of electric and thermal energy as well as for cement production. Co.'s customers are mainly the industrial companies, first of all those acting in the power industry and situated in east and northern - east Poland. Co.'s mine is located in the part of Lubelskie Coal Basin (LZW) and performs its mining operations within the mining area with surface of 57 km2.
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