Star Petroleum Refining

Star Petroleum Refining Plc (SPRC)

 

Investment thesis

SPRC is our preferred pick within the Thai refining space as it promises: 1) the most leverage with exceptionally high gasoline crack spread, 2) an incrementally larger margin as it uses domestic crude, 3) the highest dividend yield among Asian refineries, and 4) an attractive valuation. It trades at a YE16 PER of only 6.2x, a deep discount to the regional average of 9.6x and to the Thai refining peer average of 8.5x and at a YE16 PBV/ROE of only 0.06x, and deep discounts to the regional average of 0.09x and to Thai refining peer average of 0.08x. Also, its current share price implies a FY16 dividend yield of 8.0%, much higher than the regional mean of 3.3% and 4.2% of the Thai refining peer average. We, thus, initiate coverage with a BUY rating and a YE16 target price of Bt11.

Low oil price boosts strong gasoline demand 

The lower retail prices of refined petroleum products in tandem with crude prices have bolstered strong transportation demand globally, particularly in motor gasoline. The strong gasoline demand has driven up the gasoline crack spread to an exceptional high in 2015 and this persists. The resilient gasoline crack spread has also driven up the overall benchmark Singapore GRM to US$9.3/bbl in 2016YTD, US$2.8/bbl higher than the five-year average of US$6.5/bbl. As the low price environment is expected to be prolonged this year, the gasoline demand is therefore expected to show sustained strength accordingly. 

Surprisingly high gasoline crack but disappointing diesel crack 

The current gasoline crack spread has sustained a surprising high and hit a historical record at US$24.2/bbl—much higher than its five-year average of US$14.5/bbl for the first quarter, despite low seasonal demand. In contrast, the average diesel crack has been disappointing with a drop to US$10.9/bbl in 1Q16 to date—far below its five-year average of US$16.1/bbl for the first quarter, despite the high season. 

SPRC most leveraged to remarkably high gasoline crack vs. TOP 

In our view, the gasoline crack spread should remain elevated in 2016 and this should bode well for the benchmark Singapore GRM to sustain at US$7/bbl, above par level. On the contrary, the diesel crack spread is unlikely to normalize any time soon, as the global economic recovery is still of concern. As such, the exceptionally high gasoline crack spread and disappointing diesel crack spread imply a US$0.70/bbl higher market GRM for SPRC over TOP. If the elevated gasoline crack spread sustains through 2016, there will be scope for upside to the benchmark Singapore GRM as well as market GRM of Thai refineries, particularly SPRC, as the firm has the greatest gasoline yield among Thai refineries. 

Highest dividend yield among Asian refineries 

As SPRC plans major investment to upgrade its refinery again in 2019, it is likely that the firm will avoid any material CAPEX during the next few years. As such, SPRC will be cash rich during the period. We therefore expect the firm to pay a dividend at a higher payout ratio than its dividend policy of a 50% payout rate. Even if SPRC applies the 50% rate, its expected FY16 dividend yield of 8.0% is anticipated to be the highest among its Asian refinery peers.