Thai Oil

Thai Oil Plc (TOP)

Investment thesis: We attended TOP’s analyst meeting yesterday. In all, we do not see any catalysts for a further re-rating. Surprisingly strong oil prices have boosted sentiment toward the stock in recent months, but its outperformance is unlikely to prevail in the near-term. We think product margins will undershoot market expectations, squeezing earnings and prompting a consensus profit forecast downgrade. In the absence of any clear signs of a demand recovery (given rising supply), we view that TOP’s current one-year forward PER of 9.7x—about 1SD above its long-term mean and 13% higher than the regional average—is expensive. PTT and BANPU remain our preferred BUYs within Thai Energy space. 
Consensus earnings forecast downgrade ahead: While TOP expressed optimism about the 2012 energy price outlook, the firm guided that the current weakness in product prices is likely to prevail through to YE11, due to plant restarts (following maintenance shutdowns) and seasonally low demand for aromatics in Dec. Based on the firm’s guidance, we have cut our 4Q11 core earnings forecast to Bt2.5bn, which implies an 8% QoQ contraction. Despite the firmer QTD oil price than we earlier envisaged—so probably no stock loss for 4Q11—we still see only 3% upside to our existing FY11 profit forecast, which would still be 5% below the street projection.  
New energy policy—pros & cons: TOP is now playing down the benefits of Euro IV petroleum product sales (starting Jan 2012). According to management, the prices of Euro IV gasoline and diesel will be determined by an import parity mechanism. That means—at best—only slim margin accretion, as the price differentials between Singapore and Thailand are very close, given the current subsidy of Bt0.24/liter for Euro IV products that TOP receives from the govt. Also, with the phasing out of ULG 91 next year, ULG 95 usage will rise, but ethanol operators (like KSL) look set to benefit more than TOP. There will be a long-term migration toward gasohol use, given that the price of ULG 95 is high and the govt is promoting gasohol usage.
M&As ahead: TOP has an ambitious plan to become a major regional player—economies-of-scale is a major issue for refineries. The firm aims to expand its presence in Asian markets and transform itself from a commodity-base refiner into a specialty-base vendor. Management told us that many global integrated oil players are engaged in a strategic shift—divesting mid- to down-stream businesses in order to focus on upstream (E&P) operations—which will present opportunities for acquisitions. As such, we expect TOP to pursue acquisitions more actively in the year ahead.