Bangchak Petroleum

Bangchak Petroleum Plc (BCP)

Valuation and dividend yield still on the upside. We continue positive on BCP's earnings prospects, driven by strong GRM and solar power business and supported by its strong retail network, a key to increase and sustain LT profitability. Valuation wise, BCP is now trading in the middle range of regional peers with attractive dividend yield of nearly 3.6-4.4% for the next three years. We maintain our BUY with TP of Bt40/share. 
2Q13F to be better. Management guidance leads us to expect a stronger 2Q13F than 1Q13, backed by higher crude run and stronger base GRM at normal operations of 105-107kbd. Profit from the solar business will continue rising after a second phase with capacity of 16MW started up in Mar 2013. It will also be booking more insurance compensation from the fire in 2012: Bt500mn for property damage and below Bt1bn for business interruption. BCP’s preemptive shutdown of its VDU and HCU for 21 days will cost it Bt25mn, to be booked in 2Q12F; both units were back to normal on Apr 5.
Still positive on 2013F. Management trimmed its crude run target slightly to incorporate the unplanned outage in 1Q13 due to a technical problem at the vacuum distillation unit (VDU) and hydro-cracking unit (HCU) over Mar 15-Apr 4; irregularities were found in the furnace tubing. This will reduce crude run to 100-105kbd from the earlier target of 105-110kbd. Note that BCP’s crude run is currently at 108-109kbd. Its targets for base GRM and EBITDA are unchanged at US$7/bbl and Bt9.6bn, respectively. Note that base GRM in 1Q13 was US$7.97/bbl despite the unplanned shutdown.
Aiming at second place in retailing market. BCP is continuing to work to boost its market share in the retail oil business, the chief distribution channel for its refined oil products. Currently, the company is in third place for all products (14.5% market share) and second for gasoline products (17% share) but is aiming at the #2 spot, allocating an annual budget of Bt1bn to improve and rebrand existing stations and expand its network. The partnership with BIGC is a part of this business strategy. Management expects marketing margin will widen to Bt0.65/litre in 2013F from Bt0.5/litre in 1Q13.   
Investing more in increase earnings and GRM. The company plans to spend Bt22.4bn over 2013-16F, mainly to improve refinery operating efficiency and develop the third phase of its solar power business (48MW). About 40% of this investment budget or Bt8.9bn will go into the solar business. This will be financed by internal cash and long-term loans, for which it has ample room given its low interest-bearing DE ratio of only 0.55x. The investment for efficiency improvement will start in 2014F under the 3E+ project to reduce energy consumption and increase long-term GRM. Management plans to invest Bt6bn over 2014-16F for this project, which will begin to generate earnings in late 2016F.