IRPC

IRPC Plc

Q2 2012 faces net loss of B4.06 bn from stock loss
IRPC posted earnings in Q2 2012 with a net loss of B4.06bn, a larger loss than
we had expected and reversing from a net profit of B944m in Q1 2012. The loss
has resulted mainly from stock loss and inventory valuation, using lower of
cost or market (LCM), at US$7.02/bbl in total or B3.44bn, from average
Dubai crude oil price at end-Q2 2012 at US$92.9/bbl which has dropped from
average of US$120.4/bbl at end-Q1 2012. On the other hand, other major items
were still in line with projections. 1) Market GIM (market gross integrated
margin) in Q2 2012 stood at US$7.24/bbl on average (US$2.88/bbl is profit from
petrochemical business, US$1.76/bbl from power and basic utilities, and
US$2.60/bbl from petroleum). 2) Sales volume in Q2 2012 has increased to 17
million bbls from a production capacity of 15.6 million bbls in order to meet
with a plan to reduce stock of raw material and inventory to only 7.5 million
bbls from 10.5 million bbls to survive amidst the world economic
deceleration. 3) The company has booked a FX loss of B312m from the Baht
depreciation and B262 mn in loss from adjustment for valuation of investment
in trading securities (TOP). Overall, in 1st half 2012 IRPC suffered a net loss of
B3.12 bn, compared with a net profit of B6.48bn during the same period last year
 

Cut FY2012’s forecast to reflect loss in Q2 2012, positive outlook maintained for 2nd half 2012 though
We cut our net profit forecast for 2012 as shown in the table to reflect
earnings in Q2 2012 which have been reported substantially lower than
projected due mainly to stock loss and inventory valuation, using lower of
cost or market (LCM) in the quarter. Moreover, we also cut our assumption
for market GRM in 2012-2013 to US$4.5/bbl from US$5/bbl on average to
mirror market GRM in 1H12 which has not benefited from a high season
(both the winter and the US driving seasons which did not boost oil demands
significantly like it had been in the past). Furthermore, 2nd half 2012 is usually a low
season in which GRM would be weaker than in the first half of the year.
Consequently, new 2012’s earnings forecast has decreased by 78.4% from
the previous one. However, earnings in 2H12 would revert to a net profit of
B4.4bn from price and spread of petrochemical product which are projected
to recover after hitting a year’s low in Q2 2012, thanks to restocking and an
approach of a festive season during the year end.

New fair value is B4.40/share. Buy on weakness to reduce risk
Under the new forecast, we derive fair value at end-2012 (DCF) at
B4.40/share (from B5.10). We reiterate BUY but focusing on buying when the
share price weakens in order to reduce risk from the currently fluctuating
market. For investors who are able to bear risk from international investment
we recommend Honam Petrochem, a Korean listed company operating both
refinery and petrochemical business whose average PER is 8.56x, lower than
the regional average in 2012 at 12-15x.