IRPC

IRPC Plc (IRPC) 

Investment thesis

We have an emphatic SELL call on IRPC and expect its price to decline during the next month. While the firm’s GIM has fattened MTD, it will fall in Feb as the industry enters low season. The market has overpriced the value of the UHV unit (COD in 4Q15). The outlook remains subdued and the industry won’t recover till 2H16. We expect a consensus earnings forecast downgrade for FY15—our number is now 40% below the street’s. The current valuation looks stretched; post-UHV PER of 16x. For investors looking for exposure in olefins chain (due to a better outlook than for other areas of the petchem industry), we advise switching to SCC.    

Huge stock losses will make for deepest loss in 5 years for 4Q14

IRPC is likely to post a loss of Bt6,337m for 4Q14 versus a slim profit of Bt22m for 3Q14. The oil price dive will mean a stock loss and recognition of “lower cost or market” totaling Bt10bn. On the positive side, the core number should be a profit of Bt723m against a loss of Bt1.2bn in 3Q14—we expect a market GIM of US$10.5/bbl, up from 3Q14’s $6.7/bbl. Apart from seasonal demand for petroleum and petchem products, a falling crude premium (by $1.5/bbl QoQ) should flatter fourth-quarter margin.       

GIM strengthened further MTD, but a loss to be posted for 1Q15

GIM has fattened during Jan-to-date—we estimate US$11/bbl versus $10.5/bbl for 4Q14. The unusually fat margin was driven by a narrower fuel oil-Dubai spread of only $-1/bbl and high diesel-Dubai and PE-Naphtha spreads of $17/bbl and $800/t, respectively. Also, the crude premium was negative—it fell to $-2/bbl. But we believe that further stock losses will outweigh the effect, so we expect a net loss of Bt1.1bn for 1Q15. Assuming that the current Dubai price of $45/bbl (IRPC’s YE14 inventory cost was $53/bbl) prevails through to end-March the stock loss would be Bt1.9bn.      

Margin has peaked and will decline

The current high margin is unsustainable, once the market enters low season in Feb, we believe. The data indicate that fuel oil- and diesel-Dubai spreads have settled at ~US$-4 and $14-15/bbl, respectively, while we expect a soft patch for the PE-Naphtha spread to $600/t after Chinese New Year (from $800/t currently). Under that scenario, GIM will fall to $9.5/bbl from today’s $11/bbl. Moreover, a bounce in crude premium will eat up forward margin. Contracted crude premium for Feb has gone back up to US$-1.4/bbl from US$-2/bbl for Jan. As such, we assume a forward margin of below $9/bbl, close to IRPC’s break-even cost of US$8.5/bbl. 

What’s in the price?

In our view, the market has overpriced UHV unit profitability (COD 4Q15). We don’t expect an industry upturn till 2H16. There is still excess supply of 20mt (~20% more than total demand); and greater Propylene output from Naphtha-based crackers might put downward pressure on spreads. Today’s Propylene margin implies IRPC’s net incremental GIM at US$1.3/bbl (factoring in the cost-inflated UHV project), topping up its yearly profit of Bt2.5bn with downside risk from a subdued Propylene outlook. As such, the current valuation looks stretched; post-UHV PER of 16x.