Bangchak Petroleum

Bangchak Petroleum Plc (BCP) 

 

Investment thesis

Expectations of weaker 1Q16 core earnings, to be squeezed by a planned shutdown and a slimmer diesel crack spread, suggest little or no scope for share price growth going forward. There is also some risk to BCP’s FY16 bottom-line from further impairment losses, should the crude price stay low for a further extended period. However, stable, predictable solar power business revenues, together with a cheap valuation—an FY16 PER of 7.2x, 0.6SD (its long-term mean is 10.0x)—with a high dividend yield of 6.2% (against an average of4.1% for Asian refining firms) should support the share price to some extent. 

Our HOLD rating stand, but with with a lower YE16 target price of Bt35 (down from Bt39), based on SOTP methodology—Bt29 for the refinery and marketing businesses (pegged to an FY16 PER of 9x—the Asian mean) and a DCF-derived value of Bt6/share for the solar unit.

Core profit fall anticipated for 4Q15 on higher crude premium 

We expect BCP to post a net profit of Bt27m, a turnaround from the net loss reported for 4Q14 but down 94% QoQ. Stripping out an expected inventory loss of Bt1,400m, a loss on oil hedging of Bt330m, an impairment provision of Bt230m on assets, and an FX gain of Bt96m, 4Q15 core profit would be Bt1,891m, down by 12% YoY and 13% QoQ. The key factors behind the assumed core earnings fall were: 1) a lower QoQ crude run, 2) slimmer YoY market GRM, 3) higher SG&A expenses, and 4) tax expenses against a tax credit booked in 4Q14. However, marketing business earnings growth should have mitigated the effect of an expected weaker refinery unit performance. Also, the solar power business’s profit will have risen QoQ on seasonality. 

 

Note that BCP’s 4Q15 market GRM is expected to underperform the Singapore benchmark GRM (which jumped by 28% YoY and 30% QoQ to US$8/bbl) and its Thai refinery peers, due to a higher crude premium (to $3/bbl from $0.5/bbl in 3Q15) in tandem with a wider Brent-Dubai differential, as BCP’s refinery configuration requires a lighter and sweeter feedstock slate than other Thai refineries. 

Weaker diesel crack and planned shutdown to squeeze 1Q16 earnings   

The mean Singapore benchmark GRM has sustained its uptrend from US$8.0/bbl in 4Q15 to $9.6/bbl in 1Q16-to-date, buoyed by an unusually fat gasoline crack spread (due to strong demand amid low retail product prices). The gasoline crack spread has hit a new record of $24.1/bbl QTD—far above its five-year average of $14.5/bbl for the first-quarter, even though it is actually low season for demand. In contrast, the mean diesel crack has slumped to $9.7/bbl in 1Q16-to-date—far below its five-year average of $16.1/bbl for the first-quarter, even though the period is normally high season for diesel demand. 

Because BCP’s production slate is optimized for middle distillates, its 1Q16 market GRM looks set to shrink US$1.1/bbl QoQ from its 4Q15 number. Moreover, a 46-day shutdown is planned for 1Q16. As such, the 1Q16 core profit is expected to drop both YoY and QoQ.