Analyst Recomm. “BUY” TOP at ฿48 on Strongest Earnings Momentum Among Refinery Stocks

Krungsri Securities (KSS) has maintained the recommendation of Thai Oil Public Company Limited (TOP) to “BUY” with a target price at ฿48.00/share.

 

1Q20 loss at Bt13.8b (-Bt6.74/sh), in line

The net loss was resulted from stock loss (Bt10.7b) and NRV loss (Bt3.5b). Market GRM was US$0.1/bbl (vs. US$0.2 estimate), down from US$2.7 in 4Q19, dragged by weaker crack spreads of jet fuel (-US$5.3 qoq), diesel (-US$3.2 qoq), and gasoline (-US$6.2 qoq). Murban crude premium dropped to US$2.2/bbl from US$4.4 in 4Q19. Utilization for refinery remained healthy at 111%, down from 113% in 4Q19. Aromatics showed improving performance. Spreads of PX and BZ increased by US$55 and US$93 qoq to US$218/t and US$126/t respectively. These healthy spreads led to higher utilization for aromatics at 81% from 73% in 4Q19. Weaker THB against USD led to Bt2.3b FX loss vs Bt226m FX gain in 4Q19. Hence, refinery contributed Bt15.3b loss while aromatics contributed Bt459m profit to the group. Lube base oil and power business contributed Bt284m and Bt586m profit to the group in 1Q20.

 

Market GRM should improve from higher demand and lower crude premium

Many countries are easing their lockdown and this should lead to higher demand in the coming weeks. Production cut by OPEC+ has been effective since 1 May, which should reduce pressure on the supply side. Crude premium in 1Q has turned to discount in 2Q, which should drive up market GRM. Recent rebound in oil prices would reduce pressure on the potential stock loss in 2Q. TOP has higher Nelson complexity index (at 9.8), a measure of flexibility for refinery to produce lighter and more valuable products, than peers, allowing TOP to divert 7% of jet fuel output to diesel to minimize the impact of weak jet fuel crack spreads. TOP reduces jet fuel to 16% from 23% and increase diesel to 40% from 33%.

 

Maintain BUY, TP Bt48/sh; TOP has strongest earnings momentum among peers

TOP’s TP is Bt48/sh, pegged to 0.8x FY20F PBV. TOP has plenty of liquidity to fund CFP (US$2.1bn in 2020 and Bt1.1bn in 2021) with US$2.0bn cash on hand and is extending credit term for crude purchase with parent PTT by another 2 months, which will free up cash by US$600m. KSS forecasts TOP to generate EBITDA at US$460m this year and US$660m next year. Note that TOP has loan covenant for non-current liability / equity not beyond 1.5x on its standalone balance sheet vs. 0.9x at present