IRPC

IRPC Plc

Investment thesis: Meeting with IRPC confirmed our optimism over earnings accretions from the Phoenix projects and scope for growth. We expect a solid profit bounce in 1Q12 to follow the 4Q11 loss, then the Phoenix projects will sustain 2H12 earnings. Given forecast exceptional EBITDA growth of 64% YoY for FY12, the current one-year forward EV/EBITDA ratio of 9.3x implies only 0.15x our EV/EBITDA-to-EBITDA growth model.
4Q11 contraction to be followed by a strong recovery in 1Q12: The slim margin environment, reduced run rates, losses on oil hedging contracts, asset write-offs and maintenance costs severely impacted on 4Q11 numbers. Yet, IRPC guidance made us feel more positive about the prospects for 1Q12 than before. Apart from a strong bounce in GIM, QTD refining utilization jumped to 190KBD from 4Q11’s 121KBD. Also, the Bt900m hedging loss won’t recur in 1Q12 (most contracts have been settled). Based on our modeling, we preliminarily estimate a 1Q12 profit of Bt2.9bn versus a Bt2.1bn loss in 4Q11.
Earnings quality set to improve: In FY11, about half of net profit came from stock gains and oil hedging, with the operation making up the balance. But dynamics will shift dramatically this year with stronger core earnings growth, led by benefits from the Phoenix projects and much lower non-recurring expenses (asset write-offs, marked-to-market equity investments and FX. of which IRPC booked a total of Bt2.9bn in FY11). Besides, the firm has no maintenance shutdowns scheduled, so no related maintenance costs will be booked this year. 
Phoenix entering execution phase; CAPEX well accommodated: The Phoenix projects have so far progressed 16% since commencing in FY10; IRPC targets almost 50% by YE12 and completion by FY15. Four initiatives, principally the Propylene Booster and Lube Base Group 1 Specialty projects, should bear fruit this year—the first is due to start-up in May; the second in 3Q12. Moreover, only US$300m of the $2.1bn five-year CAPEX budget (including the two 110MW SPP plants with CODs in 2016) will come from debt financing. Management projects a net debt/equity ratio of just 0.3x. 
Post-Phoenix shift in profitability dynamics: IRPC laid out the benefits of the Phoenix projects. The firm expects a petroleum-to-petrochemical EBITDA breakdown of 47:53 by FY16; it was 66:34 in FY11. On the petrochemical side, the contribution from specialty products will expand to 60% from 36% with commodity products making up the balance. As such, EBITDA margin is projected to rise to 8.8% by FY16 from 5% in FY11, implying a 23% CAGR over the next 5 years.