Thai Oil

Fully Valued; Bt55.00
Price Target : Bt52.00

·         3Q11 earnings fell 25% QoQ, but grew 8% YoY to Bt2.5bn (EPS Bt1.23) driven by strong GRM and PX spreads

·         Slowing oil demand coupled with new refining capacity will cap upside

·         Maintain Fully Valued and Bt52 TP

Comment on Results

3Q11 highlights. TOP’s 3Q11 net profit of Bt2.5bn was 19% above our expectation, thanks to strong GRM of US$4.9 vs our estimate US$4.2 and strong petrochemical operations. The latter was supported by strong PX prices (+4.4% QoQ to US$1,575/t average) and spreads (+16% to US$517/t) as supply dropped in the quarter due to maintenance shutdown of regional capacities and stronger demand from downstream new PTA plants in China. TOP also booked Bt120m FX gain and Bt81m derivatives (hedging) gains in the quarter. Refinery contributed 32% of 3Q11 earnings, and petrochemical 38%. 9M11 earnings account for 93% of our full-year forecast, but we are keeping our forecast in anticipation of weaker earnings this quarter.

1.0mbd of new refining capacity coming online in 2012. Latest industry data indicate 2.8mbd of refining capacity will come online in Asia Pacific and the Middle East over 2010-2014, including 1mbd next year. This is similar to our forecast oil demand growth in both regions of 1.0mbd in 2012. Demand could weaken further if the global economy deteriorates, but this is not our base case scenario.

Recommendation

Maintain Fully Valued, TP Bt52. TOP’s earnings visibility could weaken over the next 6-12 months amid a softening global economy and declining oil prices. Our target price is pegged to 1.3x FY12F P/BV (average mid-cycle multiple, as refining industry cycle has peaked) and 13% ROE. This is in line with the sector average.