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Bangchak Petroleum

Weak GRM & slow petro sales already priced in; better quarter ahead

Bangchak Petroleum Plc (BCP)

Investment thesis

The market has already priced in expectations of weak 4Q13 earnings and concerns over the slowdown in domestic petroleum consumption, we believe. A seasonal 1Q14 spike in GRM should boost the share price in the short-term. Moreover, we think BCP's earnings should prove more resilient than its peers, given its unique business model. Its valuation remains undemanding—an FY14 PER of 7.5x, discounts its long-term average of 10.1x and to the regional mean of 10.3x—and it offers an FY14 dividend yield of 6.0%, far above the Asian refinery average of 3.5%.

Weak 4Q13 GRM prompts FY13 profit estimate cut

The average 4Q13 Singapore benchmark GRM of US$4.1/bbl (down by 40% YoY and 30% QoQ) was weaker than the market expected, due to an influx of supply from new capacity, more exports by China and India and slow regional demand. Moreover, the political confrontation resulted in slower refined petroleum product consumption. Incorporating such factors, we preliminary estimate BCP's 4Q13 net profit at Bt700m, down by 38% YoY and 48% QoQ)—our GRM, marketing margin and inventory gain assumptions for the quarter are now lower. We have also cut our FY13 net profit estimate by 14% to Bt4,672m.

GRM spike to drive QoQ earnings growth in 1Q14

Seasonally high demand for refined petroleum products during the first-quarter coupled with a supply outage due to freezing cold weather in North America has pushed up the benchmark Singapore GRM in 1Q14-to-date by 40% QoQ (albeit down 32% YoY) to US$5.8/bbl. We, therefore, expect BCP to post strong QoQ earnings growth (but a YoY decline) in 1Q14, even though marketing sales volume may soften QoQ, due to the prevailing political chaos.

Our study indicates that domestic petroleum sales correlate closely with the country's political climate (but they are not particularly sensitive to GDP growth). However, BCP's petroleum sales are more resilient to political crisis than the industry as a whole. As such, its petroleum sales volume should not decline much in 1Q14. As the political chaos may continue for some time, we have cut some FY14 assumptions—marketing sales volume by 5% to 90KBD and marketing margin by 8% to Bt0.60/liter. Consequently, our FY14 net profit forecast drops 10% to Bt5,404m and our YE14 DCF-derived target price falls to Bt38 from Bt44.

2Q14 earnings to outperform peers

The second-quarter is normally seasonally low for GRM, so the earnings of Thai refining firms will weaken QoQ in 2Q14. But we expect BCP's 2Q14 profit to beat its peers, as its solar power project phase 3 will start contributing to the bottom-line in April, mitigating the effect of revenue lost to a planned refinery turnaround. In contrast, the 2Q14 earnings of TOP will dive QoQ, as its entire complex will shut down.

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