Thai Oil

Thai Oil Plc (TOP)

Investment thesis: We attended TOP’s analyst meeting yesterday. In our view, the current risk-reward profile suggests holding TOP, rather than increasing exposure. A seasonal spike in GRM has boosted sentiment toward the stock in recent weeks, but its outperformance won’t be sustained. Earnings will peak in 1Q12, then decline in 2Q12. The stock trades at 6.8x EV/EBITDA, close to its long-term mean of 7.2x (which is our target price of Bt79). As such, we have cut our rating from BUY to HOLD.
Forecasts upped on revised oil and tax credit: In sync with MS’s revised oil price projection for 2012 and the BOI-granted (in Aug 2011) Bt 6.9bn tax exemption, we have raised our EPS forecasts by 14% to Bt7.3 for FY12 and 2% to Bt7.2 for FY13. Management said the tax credit (won for recently approved emission reduction and energy efficiency projects) is due to expire in 2019. Nonetheless, using the 4Q11 tax credit of Bt500m as a benchmark, we assume that the Bt6.9bn BOI tax exemption will be burned through within four years.
S-T GRM optimism—preparing for a dip in 2Q12: While GRM is likely firm up through 1Q12 with the regional maintenance shutdown season and frigid temperatures in Europe and the US, forward margin is still a matter of concern. TOP expressed optimism in the 2012 outlook—it anticipates fewer net capacity additions than we currently assume. But we remain worried that regional plant restarts, the resumption of shuttered facilities in Japan and significant capacity due to go on-stream in the face of weak oil demand may squeeze margins.  
Rising PX a hope, but concerns remain: Given the forecast structural downward trend in GRM, a spike in PX currently appears to be the only sustainer of earnings momentum. TOP expects PX to strengthen further through 1H12, due to substantial PTA capacity additions in the face of no new PX capacity going on-stream in 2Q12 (see Figures 1-3). Yet, it’s too early to be bullish on the PX outlook. Given that weak demand prevails and PTA margin remains poor, we don’t think new PTA plants (most of which are in China) will start-up with high initial run rates.  
Peak in 1Q12—declining trend ahead: A seasonal spike in GRM and a modest rebound in PX margin should substantially boost TOP’s 1Q12 earnings. Assuming sustained GRM and PX margin through the quarter, 1Q12 GIM is likely to bounce to US$8-8.5/bbl from$5.7/bbl in 4Q11. Also, current oil prices imply a stock gain of $2/bbl, up from $0.6/bbl in 4Q11, given a YE11 inventory cost of $106/bbl. With a projected flat price for oil (with prospects skewed toward downside) and uncertain GRM and PX outlooks, we now expect earnings to peak in 1Q12 and resume a downtrend the following quarter.