Unique R&M with hidden solar valueBangchak Petroleum Plc (BCP)
Even though we are bearish about refining fundamentals, we think that BCP's business model (together with the possibility of it unlocking hidden value by spinning off solar assets) will generate greater investor interest. We have, therefore, initiated coverage on the stock with a BUY rating and a DCF-derived YE13 target price of Bt44 (WACC = 10.2%, terminal growth = 2%). Our key investment themes follow:
Theme #1: The only refinery with volume growth & a GRM cushion
BCP's refinery business is expected to post substantial growth over the next few years, driven by: 1) a bigger crude run, 2) capacity expansion, and 3) sustained GRM. Other Thai refineries have limited scope upside to volume growth as they have been running at full capacity. In contrast, BCP's crude run this year is forecast to jump 49% YoY to 110KBD. It is also the only Thai refinery to expand refining capacity during 2013-15.
The mid-term GRM outlook is subdued—it is expected to decline in 2H13, due to an influx of new capacity—but BCP's efficiency improvement projects should provide a cushion against downside risk to GRM.
Theme #2: Marketing business to boost GIM & smooth earnings
We expect the firm's sales volume through marketing channels to sustain an uptrend going forward. There also is scope for upside to its retail sales volume from a substantial increase in the number of cars on the road. In addition, the marketing margin outlook is favorable. As crude prices this year are expected to be more stable than in 2012, marketing margin is should be sustained strong throughout 2013. With its R&M business model, BCP should, therefore, enjoy a fatter GIM than pure refineries can expect. We model that the firm will achieve a GIM of US$10.25/bbl this year, far above the Thai refinery pure-play mean of $8/bbl.
Theme # 3: Solar business …unlocking value
Upon the completion of Phase 3 of its solar buildout in 2014, BCP will be Thailand's second-largest solar power operator (after SPCG) with 169MW of installed capacity. In our view, BCP's long-term growth target of 500MW should be achievable, as the government fully supports the development of renewable energy. Given the promising outlook for solar power, we believe BCP is likely to unlock the hidden value of its solar power business by spinning off the assets and listing them on the SET. The unlocking of that value would boost its share price.