At Bt10, gain 'could be limited on debut'

Oranan Paweewun

The Nation

The IPO price of Bt10 provides a sizeable discount to shareholders, but if Esso's share price goes up to Bt11 or Bt12, its outlook may not match that of either PTT Aromatics and Refining (PTTAR) or Thai Oil, he said.

The analyst has set a fair value for Esso's stock at Bt15 for this year.

Many analysts expect Esso's stock to do well because the firm will pay a dividend of Bt1 per share. The 10-per-cent yield should attract investors, they said.

Anuwat Ruamsuke, director for equity capital markets at Phatra Securities - the underwriter for the IPO - was quoted by Dow Jones Newswires as saying Esso's IPO shares had been set at Bt10 each, after earlier announcing an indicative price range of Bt9-Bt13.

Despite oversubscription, the company reduced the number of IPO shares from 1.10 billion to 930.42 million, including 85 million shares over allotment as the Finance Ministry decided to sell only 72.5 million of its Esso shares. The ministry's shareholding after the IPO will be diluted to 7.5 per cent from 12.5 per cent.

The IPO is Thailand's largest since Rayong Refinery, which was recently merged with Aromatics to form PTTAR, conducted an IPO in May 2006. At Bt10, Esso stock will carry a price/earnings ratio of just six times, cheaper than PTTAR at seven times and Thai Oil's eight times, the analyst said.

He added that PTTAR and Thai Oil may have better prospects "in the long run". He cited PTTAR's new capacity and Thai Oil's diversified revenue structure, that can cushion it from a downward cycle.

PTTAR should become Thailand's largest oil refiner with a capacity of 280,000 barrels a day when its reformer complex is completed this December.

It should be one of the top five aromatics producers in Asia with an annual capacity of 2.23 million tonnes after a second aromatics plant is completed this September.

Thai Oil has a power generation business, which is expected to be less volatile. Its oil refining capacity is 275,000 barrels a day - higher than Esso's 177,000 barrels.

"It [Esso] lacks an investment story," the analyst said.

The Nelson Complexity Index, which tracks investment intensity and measures the additional potential of refineries, appeared to favour Thai Oil and PTTAR as well, he added.

The firm said Esso (Thailand) would have an integrated refining margin of US$8.5 (Bt267) per barrel in the first three months of the year.

But even with new supplies from India's Reliance Petroleum in the third quarter, the broker said Esso's gross refining margin would be maintained at $6 per barrel.

He said Esso (Thailand)'s retail oil business could face challenges from razor-thin margins in the industry.

Still, the company is Thailand's second-largest oil retailer in terms of market share.

According to Esso's prospectus, its oil business contributed 90.6 per cent or Bt199.9 billion of revenues last year. The petrochemical business generated the rest.

The company last year posted a net profit of Bt7.05 billion.

The broker said Esso should record a net profit of Bt5.77 billion this year and Bt5.19 billion in 2009.

Globlex Securities said in a

note that Esso's earnings outlook over the next few years may not

be outstanding, due to an absence

of major investment and an expected down-cycle for the refinery business.

"As the company does not have new investment or a capacity expansion project, earnings will mainly depend on the oil refinery and petrochemical businesses. We think that the oil refinery and petrochemical businesses already peaked in the past one to two years, so we forecast the company's earnings will start to drop," the brokerage said.

Esso plans to use proceeds from the IPO to repay its short-term debts, Globlex said.

"Its interest expenses will then decrease and this can help offset a slowdown in earnings," the broker said, adding that earnings for the next three years could be flat.

It expects Esso's net profit to stand at Bt6.07 billion in 2009 and Bt5.89 billion the following year.

Globlex recommended that investors subscribe to Esso's IPO and set its fair value for the stock at Bt14 for this year.