Thai Oil

Thai Oil Plc (TOP) 

 

Outcome trounces forecasts

TOP unveiled a solid net profit of Bt6,228m, markedly up 38% QoQ and 198% YoY. The impressive result has also surpassed upward our estimate and that of the Bloomberg consensus by 15%. Also, its core number came in at Bt5,247m, doubling QoQ and much higher than the mere Bt152m posted for 2Q14; it also exceeded our expectation, by 18%. The positive deviations were mainly from the lower effective tax rate and higher stock gain realization than we earlier modeled.   

Results highlights

The positive highlights of 2Q15 were increased utilization, a lower effective tax rate and a huge stock gain realization. A strong GRM and petchem margin environment has lent support to the complex’s higher utilization rates. Its refinery run edged up to 107% from 106% in 1Q15—while the averaged run rates at aromatics and lube base plants soared to 84% and 88%, versus the 66% and 79% rates posted for 2Q15. 

Also, the effective tax rate ended unexpectedly lower to only 5% from 9% in the prior quarter; and the firm marked stock gain and a further reversal of “lower cost or market” accounting totaling Bt2.4bn, versus the Bt1bn gain in 1Q15. To a lesser extent, market GIM almost flattened to US$9/bbl, up only US$0.1 QoQ. Stronger aromatics margins as a result of “cost-down” adjustment offset the effect of lower GRM caused by falling petroleum product crack spreads, mainly diesel and jet fuel. Even so, the reported GIM was in line with our estimate.  

Outlook

The falling oil price reduced crude premium and fuel & loss on crude processing in 3Q15. However, that only partially offsets the loss in GIM, caused by greater decline in its petroleum product prices (mainly diesel & jet fuel) than the drop in crude costs. The 31% and 36% QTD retreats in jet fuel and diesel crack spreads would hit TOP’s 3Q15 GIM the most among Thai refining & chem counters. Based on QTD petroleum crack spreads and the Murban-Dubai crude price, our simulation model indicated a fall of US$2.4/bbl or 27% QoQ. With that, its core earnings will more than halve to Bt1.9bn. The possibility of huge losses on crude inventory and FX will also hit its bottom line harder. Based on the current Brent price and THB/USD rate, NPAT will fall into the red to the tune of Bt1.3bn.  

What’s changed? 

We maintain our FY15 NPAT forecast of Bt14,048m unchanged at the moment, although 1H15 NPAT accounted for as much as 76% of our full-year estimate. However, risk to our projection is skewed toward the downside, particularly from fluctuations in oil price and the THB/USD rate.

Recommendation

Despite a 13% retreat in the stock’s price over the past month, we maintain our negative bias on its share-price performance. As US driving season will end this month, the gasoline crack spread is unlikely to sustain its current high. Moreover, aromatics margins are trending downward through 4Q15 due to a restart of a fire-damaged aromatics plant in China and capacity additions. If that were to be the case, those factors would be further bad signs for its GIM outlook and scope for consensus earnings forecast cuts.