Market gives the thumbs up

Esso (Thailand)'s share debut yesterday offered up to 10 per cent gains from its initial public offering (IPO) price of Bt10.

Analysts recommended a "buy" rating at a price of near Bt10, but some said it may be less attractive if it surges ahead of Bt11.

The stock opened at Bt10.90 before touching its high of Bt11 yesterday. It later eased to close at Bt10.50, giving investors a 5-per-cent net return from its IPO price.

Esso's IPO was the biggest in Thailand since the middle of last year, which raised Bt9.30 billion.

The company issued 930.42 million shares, including an additional 84.58 million greenshoe option, which was exercised when subscription levels exceeded expectations.

It was the second company that started trading this year after Lohakij Metal (LHK).

Lohaki, however, fell 23.91 per cent from its IPO price during its debut.

Esso is the country's fourth largest oil refiner with a capacity of 177,000 barrels a day. It also generates 500,000 tonnes of paraxylene a year.

It is the second largest oil retail operator in Thailand with 580 petrol stations operating nationwide.

A broker said it had set a target price of Bt12-Bt13 for Esso, based on a price-to-earnings (P/E) ratio of 7-8 times for this year.

With its Bt10 IPO price, Esso stock offers a 9-per-cent discount from market prices set by local rivals, the broker said. "Unlike its competitors such as the PTT group, Esso does not have a big expansion plan for the near future, he noted.

"This means Esso could see a flat production capacity. Earnings will depend entirely on gross refining margins and on the spread of paraxylene," he said.

Esso has the lowest complexity for its refinery and petrochemical units.

Its Nelson Index is only 6.6, therefore the Esso refinery appears to have a lower conversion capability to produce high-value refined oil products, the broker said.

Its GRM (gross refinery margin) is lower than its rivals, he said.

The broker said Esso's GRM last year stood at US$6.5 (Bt206) per barrel, compared with $9 and $10 per barrel for Thai Oil (TOP) and PTT Aromatics and Refining (PTTAR).

Esso also had a lower earnings diversification than its local competitors. Its main business is in refinery, which accounted for 91 per cent of its revenue and 84 per cent of its operating profits last year.

"Esso has 583 petrol stations around the country, which currently face a margin squeeze," the broker added.

Among Esso's strong points is its Bt1 dividend, which will be paid to shareholders next month.

The company had also lowered its interest expenses.

It will use part of the proceeds from its IPO to pay down debts.

"We estimated that interest expense for 2008 would be reduced by Bt500 million to Bt2.7 billion, down from Bt3.3 billion in 2007," the broker said.

UOB Kay Hian Securities' senior director of research, Kosin Sripaiboon, said his firm may lower its target price for Esso from Bt15 that was set earlier. He recommended that investors buy the stock when it weakened to Bt10.50 towards the close of yesterday's trading.

Esso director and public affairs manager Mongkolnimit Auacherdkul said he was satisfied by the stock's performance yesterday.

Proceeds of the issue will be used as working capital and dividend payments, he said.

Its earnings outlook this year is expected to be better than last year, he said, given its policy of cost controls and production improvement.

He was not able to predict its gross refinery margin due to a spate of factors pressuring the GRM.

The company plans to invest Bt200 million this year to improve production efficiency, he said.

Executive vice president of Phatra Securities Manpong Senanarong said the current share price was suitable. "Esso's share price is not too volatile, which is a good thing," he said. "I hope its price will rise further to offer good returns to shareholders.

The IPO price at Bt10 per share offers a 10-per-cent discount," he said.

Phatra Securities acted as financial adviser for Esso's IPO.