Thai Oil

Thai Oil Plc (TOP)
 

Insights into Q4 2011 -  the worst is over; seasonal trade just beginning
Investment thesis: Despite the bearish crude outlook and concerns about increasing supply pressure, we are tactically near-term positive about TOP. Current risk-reward dynamics present a trading opportunity. Short-term earnings risk has ebbed and there is scope for upside, due to it being high season for GRM, the benefits of a Euro IV price hike and crude strength facilitated by geopolitical tensions. TOP trades at a one-year forward PBV of 1.4x, 0.6SD below its long-term mean, which implies a GRM of US$4/bbl and a PX-ULG95 spread of $500/t versus its current GRM of US$4.5-5/bbl and a spot PX margin of US$500/t.
4Q11 profit probably weakest of FY11 … We have revisited our model and maintain a full-year estimate of Bt14,975m. That implies 4Q11 earnings of Bt1,903m—a 27% QoQ contraction, attributable to the slim margin environment. Market GIM probably retreated to US$5.8/bbl from $7.8/bbl the previous quarter. We expect TOP to post a market GRM of $3.2/bbl, down from $4.9/bbl in 3Q11, in tandem with a falling Singapore benchmark and the effect of a higher crude premium during 4Q11. Slimmer aromatics and lube base margins also weighed down on market GIM.
…but a strong bounce expected in 1Q11—seasonal spike in GRM and benefit on Euro IV the drivers: Regardless of oil price levels, we are optimistic about TOP’s 1Q12 outlook. GRM has strengthened since the start of the year, buoyed by higher crack spreads for all products, particularly fuel oil (due to limited supply availability). Upcoming maintenance season at refineries across the globe should keep GRM fat throughout the quarter, in our view. Also, the recent rise in Euro IV standard product prices for both gasoline and diesel by Bt0.48 and Bt0.43/liter, respectively, (effective Jan 1) will add to the firm’s GRM by US$0.6/bbl. As such, we roughly calculate that TOP’s GRM will rebound to the $4.5-5/bbl range in 1Q12 from $3.2/bbl in 4Q11.
FY12 profit downside risk currently appears limited: While our current forecast for FY12 is 9% below the street’s, due to our bearish crude expectation, we think there is only modest risk of a consensus earnings projection downgrade at the moment. Concerns that Western efforts to contain Iran’s nuclear ambitions might result in Persian Gulf supply disruption have kept crude prices high, while new refining supply pressure is unlikely to materially impact on GRM in the near-term, as the upcoming maintenance season should outweigh the effect of the rise. Additionally, the aforesaid Euro IV price hike will boost TOP’s yearly profit by Bt1.2bn.
------