IRPC

IRPC Plc

Consensus-missed results

IRPC announced a deep net loss of Bt5,779m for 4Q14 versus a slim profit of Bt22m for 3Q14. The result was as we expected, but was deeper than the consensus estimate of a Bt5bn loss, due largely to greater stock loss and LCM realization, in our view. The core number, however, flipped into the firm’s first profit in over two years of Bt1,245m (following a loss of Bt1,203m for 3Q14), which was also in line with our expectation.       

Result highlights 

The negative highlights of 4Q14 were recognition of hefty stock losses and a “lower cost or market” accounting item totaling Bt8,785m. That translates into a US$16.04/bbl loss versus the $4.46/bbl loss posted for 3Q14. The deep loss squeezed IRPC’s accounting GIM to $-6.04/bbl from $3.01/bbl in 3Q14. Also, planned shutdowns of aromatics (for 25 days) and olefins (for 15 days) plants during the quarter cut the plants’ utilization rates to 74% and 77%, respectively, from 87% and 84%.

Operationally, however, IRPC reported a record market GIM of US$10.38/bbl, up from 3Q14’s $6.72/bbl and well above its break-even cost of $8.50/bbl. The fat margin boosted the core number to a profit for the first quarter in two years. Lower fuel & loss on crude processing and a falling crude premium as a result of the oil price dive contributed to the big margin improvement. Furthermore, there was seasonally heavy demand for petroleum products. And a Bt1bn insurance payout against the fire at the VGOHT unit eased 4Q14 earnings downside.    

Outlook

The recent oil price bounce has eased stock loss pressure, so the 1Q15 bottom-line may be in black ink, given that IRPC marked down its inventory cost to US$53/bbl at YE14 versus a Dubai price today of $56/bbl. Yet we are subdued over the core profit outlook on a QoQ comparison. GIM has been fat YTD, but we expect a weaker GIM trend in coming months, as a low season for refining and petchem is approaching and the crude premium benefit will be less impressive than it was in 4Q14.  

What’s changed? 

Our FY15 core profit forecast of Bt1,753m stands unchanged. Lower fuel & loss on crude processing and crude benefit in tandem with the low oil price climate supports the firm’s FY15 GIM outlook; we assume US$9.50/bbl (up from FY14’s $7.60/bbl). But our GIM assumption is conservative, given the prevailing margin of $11/bbl and a consensus FY15 estimate range of $10-10.50/bbl. Our rationale is that GIM will normalize to or below $9/bbl during 2015. As such, we expect a street FY15 earnings forecast downgrade (it is currently 44% higher than our projection). 

YTD operational gains and anticipation of profit accretion from the UHV project have caused unrealistic expectations to build over IRPC’s outlook. Its current valuation is too stretched. Even under the best-case scenario (GIM sustained at US$11/bbl plus with extra margin of $2/bbl from the UHV, as IRPC guides) implies a two-year forward PER (post-UHV completion) of 11.2x—expensive compared with the cheapest Thai refining (BCP) and petchem plays (PTTGC) of 9.0x and 9.9x, respectively. 

Yet, today’s Propylene-fuel oil spread missed the firm’s guidance, implying incremental margin from UHV of only $1.5/bbl, so earnings accretion of Bt2.6bn/year, which would be in line with our estimate. In that case, the two-year forward PER would be 19.6x. SELL!