Thai Oil

Thai Oil Plc (TOP)

 

Strong profit bounce reported as expected

TOP’s 4Q15 NPAT flipped into a solid profit of Bt3,749m against reported huge losses of Bt2,294m in 3Q15 and also Bt6,479m in 4Q14. The strong bottom-line bounce was consistent with our expectation and the street projection. Stripping out extra items, the core number came in at Bt6,200m, markedly up 50% QoQ and 195% YoY. The refiner also announced 2H15 DPS of Bt1.80, bringing up a full-year number of Bt2.70 (as expected). That translated to a 45% payout, on par with its historical norm.    

Results highlights

The positive highlights of 4Q15 were TOP’s best-ever operational performance buoyed by record-high GRM and refining utilization rate. It reported market GRM of US$8.5/bbl (versus 3Q15’s US$6.6/bbl), the highest seen after the 2008/09 crisis, due in large part to the prevailing high gasoline crack and also a seasonal strength in the diesel crack. That brought up overall market GIM to US$10.7/bbl, substantially up US$2.9 from 3Q15’s. Strong product cracks also boosted refining utilization to an all-time high of 110% from 107% a quarter ago. 

Moreover, the firm was well positioned to hedge against its oil inventory during the quarter. That resulted in a realization of the exceptional gain of Bt1bn, partly mitigating the effect of stock loss and recognition of lower cost or market (LCM) accounting totaling Bt4.2bn in the fourth quarter. There was also the plus of advancing contributions from both aromatics and lube base units owing to QoQ stronger product spreads. 

Outlook

The recent correction in the Singapore GRM will definitely squeeze effective margins across the refining space in 1Q16. TOP, however, seemed to be hit the hardest given that it has the highest diesel exposure among Thai refining counters. A spike in the Murban crude premium may also be another hit—the premium rose further to US$3/bbl in Jan from US$2/bbl in 4Q15. Based on the QTD petroleum crack spreads and the Jan Murban crude premium, our simulation model indicated a dip in market GRM of US$2/bbl or 23% QoQ. With that in mind, we modeled its bottom-line number to drop by 12% QoQ. 

What’s changed? 

We maintain our FY16 NPAT forecast of Bt17,649m unchanged at the moment. Slowing demand growth prompting a below-par diesel crack spread remains the key variable factor to have a bearing on our projection.

Recommendation

Despite a 13% correction in TOP’s share price, we stand by our NEUTRAL rating on the stock. Slower GDP growth could point to demand weakness, particularly involving diesel, but we are still optimistic over the buoyant gasoline margins in the lower oil price environment—which would partially mitigate the impact on the margin. As such, we continue to prefer SPRC over TOP; its highest gasoline exposure means more earnings resilience in the event that demand destruction arises. Moreover, it is also one of highest yield stocks in the SET-listed space—we estimated 10.8% for FY16.