IRPC

IRPC Plc 

 

Investment thesis

We recently took top executives on a road show to Singapore. In all, the feedback from the meetings with the investors was quite positive. They were impressed about IRPC’s improving core operations and strategic focus on organic rather than inorganic expansion. A change in UHV’s product yield toward a gasoline-based mode (with less propylene production) seemed to excite the investors. Most were still optimistic over the GRM outlook, mainly the gasoline crack (but cautious on the propylene market due to the influx of new supply and the slowing GDP in China). We, however, feel that the keen move remains to be seen until the shift in gasoline-based production materializes. We have summarized key discussions as follows.      

UHV nears completion and re-optimization to conclude in 2Q16 

The UHV project attracted strong interest from the investors. The plant is due for a commissioning test-run this week and the utilization will gradually ramp up in 2Q16. Based on its designed specifications, the gasoline portion will rise to 31% (from its current 21%) of total product slate plus another 6% for propylene product—while low-valued products, such as lube base and fuel oil, will be reduced to 10% and 8% from 14% and 23%, respectively. Management said that the unit was flexibly designed to enable re-optimized production with a greater gasoline component—by which that component can be immediately adjusted up to 33%. However, IPRC is studying the boosting of the gasoline portion to tap a robust rise in gasoline crack—but the result will only be available after the unit achieves a full-capacity run.    

GIM outlook and ROIC target of 14%

The investors were generally impressed with IPRC’s ambitious Return on Invested Capital (ROIC) target of 14% versus 8% in 2015, but doubted whether fluctuations in commodity prices would permit that to be achieved. The CEO passed on that the PP expansion and new PP compound plant set to be commissioned in July 2017 will the increase of its specialty products to 60% of total portfolio—the downstream integration aims to counter the effect of a cyclical downturn of commodity prices. It also aims to cut losses on fuel use from 6% to a 3% benchmark, which would further enhance the margin. As such, he believed its effective GIM of at least US$14-15/bbl should be sustained.

Besides that, the start-up of its JV SPP projects with GPSC (due to commence in 2H17) should boost its yearly profit by Bt1bn/year. Asked about the GIM outlook for 2016, he conservatively guided for a market GIM of US$14/bbl (on par with last year’s). But the UHV project would add US$2/bbl with scope for upside from increased gasoline portion—he expected a margin accretion of US$0.5/bbl. Finally, the company is studying the possibility to postpone its one-month maintenance shutdown in Nov until 1Q-2Q17 in order to run it up concurrently with UHV’s warranty inspection period. If this were to be the case, we expected a profit addition of Bt2bn on our current FY16 estimate.

‘Everest’ project—free-ride organic initiatives 

The chief executive also talked to persuaded investors regarding the firm’s recently initiated “Everest” project. It is aimed at changing the workplace culture and building human resource capabilities. While they remained neutral on the development, they were positive on management’s efforts to enhance the company’s value through organic means. Executives said that the project was risk-free with no fixed cost, given that the consultant fee is tied to a 10% sharing on incremental EBITDA derived from the project. On management’s confidence about the project’s success, the consultant strongly believed in an EBITDA uplift of US$300m but admitted that executive would be quite challenging. More or less, the project would be a top-up for the UHV and PP projects, enabling IRPC to achieve its ROIC target of 14%.     

Positive free cash flow with higher dividend payout

The firm vowed to maintain a high dividend payout policy after delivering a 48% payout in 2015, as there will be a smaller investment budget totaling ~US$600m in 2016-17. However, he pointed that the firm was due to repay a large shrunk of loans over the next two years; and therefore limit the firm’s ability to raise the payout. From 2018 onward, it will become a cash cow with only maintenance CAPEX of US$70m/year. Given its D/E target of 0.8-0.9x, he expressed that the dividend payout would have been raised to 80-90%. Assuming US$14/bbl GIM to hold through 2018, dividend yield will rise robustly to almost 10%, doubling from 2015’s.