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Published on April 17, 2008

If shares in the initial public offering (IPO) of Esso (Thailand) are priced at Bt9 each, analysts predict the stock will be attractive to both local and foreign investors.

However, if the price is fixed at Bt13 per share, it will be overvalued when compared with the company's fundamentals and the stocks of other oil refiners.

Thailand's fourth-largest oil refiner has set an indicative price range for its IPO shares of Bt9 to Bt13 each. The price will be finalised next Thursday. Based on the indicative price range, the price-to-equity ratio of Esso (Thailand) is 4.3-6.2.

The company will go public by offering 1.099 billion shares. Of these, 773.33 million will be newly issued shares and the rest are shares currently held by the Finance Ministry. It has set aside as many as 84.6 million shares in case of oversubscription.

Of the total offering, half will be allotted to international investors and the remainder to local investors. Thai institutional investors will be offered 228.57 million shares, general investors 159.32 million and retail investors 161.9 million.

For retail investors, shares will be distributed through branches of Bangkok Bank and Krung Thai Bank next Monday and Tuesday. A minimum purchase of 2,000 shares is required.

Proceeds from the IPO will be used mainly to service debts of Esso (Thailand). Phatra Securities is serving as financial adviser for the IPO.

The company's refinery complex has a rated capacity of 177,000 barrels of oil a day and 500,000 tonnes of paraxylene per year. The company, which is a unit of US giant ExxonMobil, also operates 580 fuel stations in Thailand. It has a 16-per-cent share of the country's oil-refining business.

The Esso (Thailand) IPO will be Thailand's largest initial offering this year, with a market capitalisation of around Bt40 billion. It will become one of the top 50 largest market cap stocks on the Stock Exchange of Thailand. It will debut on May 6.

Following the share allocation, US parent Exxon will see its shareholding diluted from 87.5 per cent to 65.9 per cent, while the Finance Ministry will no longer hold Esso (Thailand) shares.

KTB Securities' assistant managing director Supakorn Sujiratwimol said the selling price would be the main determinant of whether investors would have an appetite for the IPO shares.

If the offering price is set at Bt9 each, the stock will be attractive. But if the IPO price is set as high as Bt13 per share, it will not be attractive, she said.

In the case of Esso's IPO price being fixed at the high end of the indicative range, Supakorn will prefer Thai Oil stock, given that it has better business potential and does not depend for policy decisions on a parent firm.

"The Esso range will make it the 30th-largest market cap stock on the Thai bourse. Whether it will be attractive will depend on its pricing. The oil-refinery business is not so distinctive, and management at Esso (Thailand) relies mainly on its parent firm abroad," she said.

A foreign broker said that even if Esso (Thailand) shares were sold at the high end of the indicative price, it would represent a discount on other oil refiners. However, the discount is offset by Esso's lower unit profit. The selling, general and administrative (SG&A) expenses of Esso (Thailand) are more than twice those of other Thai oil refiners, although its operation is smaller.

According to Esso's filing with the Securities and Exchange Commission, its SG&A last year amounted to Bt4.4 billion, while 90.6 per cent of its sales revenue came from the refining and retail oil businesses and the rest from petrochemicals.

By way of comparison, Thai Oil and PTT Aromatics and Refining (PTTAR) had SG&A expenses of about Bt1.77 billion and Bt1.58 billion, respectively, in 2007. Esso (Thailand) is probably exposed to higher downside risks from the oil-refining business than either Thai Oil or PTTAR.

Thai Oil's revenue structure is more diversified and it has exposure to the less-volatile power business, while PTTAR is planning to double its paraxylene capacity this year to cushion the impact on its earnings from the downward cycle in the refinery business.

Moreover, Esso (Thailand) does not have any major investments that will boost its earnings in the future.

A promise by Esso (Thailand) to pay a dividend of Bt1 per share in June and a possible hike in gross refining margin in the second quarter seem to be catalysts for the stock in the short term.

A Sicco Securities analyst said the timing of the debut for Esso (Thailand) shares was right, because the second quarter was the peak season for the oil-refining business.

Esso (Thailand) shares  are  expected to receive a warm welcome from retail investors, because energy stocks offer good returns to shareholders, the analyst said.

The company posted a profit of Bt7.05 billion from revenue of Bt199.9 billion last year, up from a profit of Bt1.57 billion on revenue of Bt195.3 billion in 2006, largely due to debt-restructuring gains.

Siriporn Chanjindamanee, Oranan Paweewun

The Nation