IRPC

IRPC Plc
Petrochemical price tends to improve in 2H13, already in our forecast
Petrochemical price has risen from 1H13. Spreads of PE (polyethylene), PP
(polypropylene) and PS (polystrylene) have widen continuously as a result of
increasing demands, especially from Asia such as China and India that
comprise more than 60% of total demands. Global PE demands have
increased 4.6%, outgrowing the world GDP. As most entrepreneurs are now
having low products in stock, the increasing demands will benefit the product
price and spread. Moreover, late 3Q and early 4Q are a high season of the
petrochemical industry during which entrepreneurs will start producing for
New Year and Chinese New Year, so average product spread in 2H13 would
increase from 1H13. However, in terms of financial position, the company is
facing a risk as Moody’s and S&P have just downgraded credit ratings of
IRPC, reflecting weak earnings in the next 1-2 years. Current total debt to
EBITDA ratio is high at 7-8x, while in the next 1-2 years IRPC will have to
create additional debt of B15-20bn for the planned Phoenix investment
projects, which will make the ratio remain high and pose a negative impact
on the company. Although IRPC has a plan to decrease a cash cycle by
having the debt repayment due extended with trade account payable to
increase its liquidity, which has received cooperation from PTT, it is only a
short-term measure to avoid a capital increase (which will causes dilution
effect). This means IRPC will still have credit rating of lower than the
investment grade, so the company will have high financial cost if it has to
raise capital from overseas.

2H13 to reverse to net profit, so does 2013
We maintain our earnings forecast for FY2013, projecting 2H13 to reverse to
a net profit of B2.2bn following the likely reviving economy in 2H13 that
would boost petroleum and petrochemical demands and thus boost product
prices and spreads. In addition, according to the Phoenix project, IRPC has
planned to increase a production capacity of ABS extension by 60,000 million
tons a year, which would be complete by 3Q13. Moreover, the refinery
business will benefit from the U.S. driving season, Indonesia’ Ramadan,
Hurricane in the Gulf of Mexico, and winter at the end of the year. Dubai
crude oil price in 2H13 would be able to stand above US$100/barrel, so the
company would not face a high stock loss like in 2Q13. We estimate a net
profit in FY2013 at B1.24bn, versus a net loss of B959m in FY2012.
Magnificent profit growth of 236%yoy is projected in 2014.

Hold. Share price already absorbs bad factors but PER is high & div yield is low
FY2013 fair value is B4.01/share (DCF). We recommend only holding for IRPC
because the current PER is high at 49.4x. Moreover, IRPC has been investing
according to its Phoenix project in order to generate long-term growth that
will finish in 2015. Additionally, there would not be interim dividend payment
in 2013 because of the net loss in 1H13, but FY2013 dividend is expected at
B0.02/share or a yield of only 0.6% p.a.