Bangchak Petroleum

Bangchak Petroleum Plc (BCP)       

Investment thesis

The worst quarter is now behind us, we believe, and BCP’s strong earnings growth momentum, buoyed by R&M margin expansion and volume growth should catalyze the share price going forward. Moreover, the valuation is undemanding—the current share price implies an FY15 PER of 10x for the refinery and marketing units, equal to its long-term mean and a deep discount to the regional average of 14.8x. We have, therefore, upgraded our rating from HOLD to BUY.  

Core profit growth expected, but huge extra losses = net loss

We expect BCP to post a 4Q14 core profit of Bt2,568m, a YoY turnaround and up 80% QoQ, driven by: 1) fatter market GRM (up by 76% YoY and 23% QoQ to US$8.5/bbl), 2) a greater crude run (up by 1% YoY and 5% QoQ to 102KBD), 3) a 39% fatter YoY marketing margin (down 4% QoQ) to Bt0.68/liter and 4) a bigger contribution from the solar power business. 

However, the 4Q14 bottom-line will post a loss, due to a huge inventory loss & LCM of about Bt4,653m, an impairment loss of Bt900m and an expected FX loss of Bt118m. That said, BCP should book a gain on oil hedging of Bt92m and an insurance payout of Bt200m, which would mitigate the effect of the expected extra losses. As such, we estimate a 4Q14 net loss of Bt2,810m, a reversal from the net profits posted for 4Q13 and 3Q14. That would make for an FY14 net profit of just Bt390m (we had previously forecast Bt4,653m).

1Q15 core earnings to rise and bottom-line to turn around 

BCP is expected to sustain core earnings growth momentum (both YoY and QoQ) through 1Q15, driven by a bigger crude run, a fatter market GRM, greater marketing sales volume and margin and a larger contribution from the solar power business. Moreover, the firm’s 1Q15 bottom-line will turn around to black ink on a shallower inventory loss, we believe.

Good margin prospects prompt FY15 earnings forecast upgrade

Historical statistics indicate a lag time between shifts in crude prices and changes in the prices of refined products. As such, GRM normally fattens during a period of falling oil prices, as has proved the case during this crude price downtrend. The Dubai crude price dropped from US$104/bbl in July 2014 to $44 currently. In contrast, the Singapore benchmark GRM has surged from $4.1/bbl to $7.5/bbl during the same period (Figure 2). The marketing business has also gained from crude price weakness, due to both increased demand and fatter marketing margins (which have moved in much the same pattern as GRM, Figure 3).

Good margin and prospects for demand prompted us to upgrade our FY15 net profit forecast 7% to Bt5,768m (Figure 4) and increase our SOTP-derived YE15 target price from Bt33 to Bt37.