Thai Oil

Thai Oil Plc (TOP)

TOP’s move to acquire a 19% stake in Thai Oil Power would further consolidate its position in the power business ahead of the upcoming IPP bidding round III. We see this as a timely and value-accretive move to enhance the group’s earnings sustainability. The acquisition of J-Power (Thailand)’s stake raises TOP’s shareholding in Thai Oil Power from 55% to 74%. This move however does not change our Neutral stance or target price which remains at THB78, based on 6x CY14 EV/EBITDA, the regional peer average. 

What Happened
TOP announced the acquisition of a 19% stake in Thai Oil Power (TP) for THB1.6bn. The transaction is expected to be completed by end-Dec 2012. Post-acquisition, TOP will increase its shareholding in TP from 55% to 74% and effectively increase its equity capacity by 94MW, up 22% from 433MW currently.
What We Think
We believe this strategic move is value accretive to TOP given that: 1) the acquisition cost of US$600m per MW capacity (vs. US$800m-1bn per MW for greenfield capacity) is reasonable for a gas-fired power plant asset; and 2) the acquisition will add about THB145m in earnings to TOP (+0.9% for 2013 earnings forecast), and is estimated to have an 11-year payback period. We believe this strategic move is timely for TOP to consolidate its power assets in preparation for the IPP bidding round III that is scheduled for 2013.
What You Should Do
While we see this acquisition as a positive move, we believe the impact is insignificant. We continue to view TOP as trading stock with highly volatile earnings from its core refinery and inventory fluctuations. We see limited upside from current level, and prefer PTTGC as a better
play on its cheap gas feedstock for both olefin and aromatics earnings.We also believe that TOP lacks volume growth and earnings sustainability compared to PTTGC’s core olefin earnings and rising utilisation rate