Bangchak Petroleum

Investment thesis

Concerns about PTT’s share sell-down plan remain an overhanging issue. Also, we remain concerned about BCP’s plans to increase investment exposure to E&P. In the interim, there is downside risk to FY14 earnings from falling crude prices, while an expected GRM down-cycle next year limits the scope for stock price upside. We, therefore, maintain our HOLD rating. 

Our investment horizon shifts to YE15 and we have changed our valuation methodology to SOTP (PER for the refinery and marketing businesses and DCF for the solar business) from DCF, which we think is a more appropriate manner to value the refinery and marketing units during a down-cycle. Our YE15 target price is Bt33—Bt27 for refinery and marketing businesses (pegged to YE15 PER of 10x [its long-term mean]) and Bt6 for the solar business. The current share price implies an FY15 PER of 11x for the refinery and marketing units, a 10% premium to its long-term mean.  

Big inventory loss to squeeze 3Q14 bottom-line 

We expect BCP to post 3Q14 core earnings of Bt1,623m, up by 901% YoY and 187% QoQ, driven by: 1) fatter market GRM (up by 27% YoY and 23% QoQ to US$6.0/bbl), 2) a greater crude run (up 25% QoQ [down 4% YoY] to 97KBD, 3) fatter marketing margin (up 34% YoY [down 11% QoQ] to Bt0.71/liter) and 4) a bigger contribution from the solar power business, as Solar Farm Phase-3, which started up in 2Q14, operated for the full quarter in 3Q14. Note that there was also a 46-day maintenance turnaround at the refinery in 2Q14.

Although core profit is expected to post YoY and QoQ expansion, we anticipate a YoY and QoQ bottom-line contraction for 3Q14, due mostly to an inventory loss of about Bt1,291m. BCP should book a gain on oil hedging of Bt166m and an FX gain of Bt16m, which would mitigate the effect of the expected inventory loss somewhat. We estimate a 3Q14 net profit of Bt515m, down by 62% YoY and 59% QoQ.

Core profit growth forecast for 4Q14 on a greater crude run 

As the firm maintains its FY14 crude run at 90-94KBD, we expect the crude run in 4Q14 to increase by 9% YoY and 13% QoQ to 110KBD and marketing sales volume to rise accordingly. Also, market GRM is expected to fatten YoY and be sustained stable QoQ, driven by high seasonal demand during the winter (despite the end of US driving season). Furthermore, we assume that marketing margin will increase YoY (and be flat QoQ), driven by an improved industrial margin. 

Even though core earnings are expected to be strong, there is significant downside risk to BCP’s 4Q14 bottom-line from further inventory losses. If the average Dubai price is US$85/bbl in 4Q14, we would preliminarily assume BCP’s inventory loss at about Bt5bn for the quarter.