IRPC

IRPC Plc 

 

Investment thesis

IRPC is our most preferred pick with its greatest scope for earnings upside within the Thai refining space. Its soon-to-begin upstream project for hygiene and value added product (UHV) would sustain strong core integrated margin well into 2016. Continued oil price weakness will benefit downstream refining, but IRPC the most. New supply from Iran would put greater downward pressure on its crude premiums, Arab light (the main type of crude it uses), than that of other crude sources. A spectacular upturn in the Asphalt price would also be its unlocked value—which would be a top-up on its margin rather than a distortion as has been experienced historically. Valuation-wise, its complex-like ROE would prompt a further valuation re-rating, as the current valuation of one-year forward P/BV of 0.9x (versus peers’ 1.1x) is unjustified. Key positives are highlighted below.    

New norm for earnings base with complex-like ROE

With the low oil price to prevail well into 2016, we have renewed optimism on IRPC’s profit profile after the Dec start-up of the UHV; and the anticipated NPAT is to continue its strength of > Bt10bn for 2016—our current forecast is 36% higher than the consensus estimate. These growth characteristics would raise the firm’s levelized ROE base to mid-teen level from a low single digit and are in line with that of its complex counters. A broad improvement in its forward profitability leads us to believe that a market GIM of US$14/bbl would be our base-case scenario. 

Lower and longer crude premium

We believe crude premiums will extend lower for longer into 2016 amid growing concern over new Iranian supply. Within the Thai refining space, IRPC has the most direct benefit from this phenomenon, given that it mainly uses Arab Light, which has a similar quality to that of Iranian oil. As is evident, the Arab Light-Dubai price has so far been at a discount since the collapse of oil price in Dec—while Murban (mostly used by other Thai refiners, such as TOP) was still at a premium over the price of Dubai. 

Unlocked Asphalt price a top-up on margin

The price of Asphalt, a lube oil byproduct from low-valued fuel oil’s upgrading process, has been muted—much below the lube oil price and even lower than its feedstock, fuel oil. That means a margin impact to IRPC of US$0.2/bbl. Even so, the price has started to improve and now exceeds the fuel oil price, prompting the margin to reverse into gain of US$0.8/bbl. We expect the demand and price for Asphalt to prevail for the next 2-3 years following the govt-stimulus economic policy on road construction.  

Significant margin accretion from UHV / PP projects

The UHV project’s start-up would potentially turn IRPC into a complex. Its purpose is to upgrade fuel oil to 320ktpa of Propylene—a commission test-run is due in November and COD by early January. Despite seasonally low demand for petchem and growing concerns over China’s macro environment, the QTD Propylene-fuel oil spread still implied a moderate margin accretion of US$2/bbl. Also, the firm is building a Polypropylene (PP) project aimed at converting 320ktpa of Propylene from the UHV into PP. Based on the QTD PP price, the initiative would boost margin by almost US$400/t, implying a further margin accretion of US$1.5/bbl.