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Bangchak Petroleum

Our favourite refinery play! 4Q13 number beat estimate; weaker 1Q14 profit expected & priced in

Bangchak Petroleum Plc (BCP)

Investment thesis

The key messages from the analyst meeting reaffirmed our optimistic view of BCP's short-and long-term growth prospects. Moreover, a seasonal 1Q14 spike in GRM and expectations QoQ core earnings expansion should boost the share price in the short-term. Note also that BCP's earnings profile is smoother than the profiles of any of its refining peers, due to its unique business model. The FY14 PER of 8.1x is undemanding—discounted to both its long-term average of 10.1x and to the regional mean of 12.6x. The firm also offers an FY14 dividend yield of 5.5%, far above the Asian refinery average of 3.4%.

QoQ core earnings growth anticipated for 1Q14

We expect BCP to post strong QoQ core earnings growth (but a YoY decline) in 1Q14, even though the prevailing political chaos may make for softer QoQ marketing sales volume. The key drivers are: 1) a greater market GRM and 2) a fatter marketing margin. The benchmark Singapore GRM in 1Q14-to-date is up 54% QoQ (albeit down 25% YoY) to US$6.3/bbl, brought about by seasonally high demand coupled with supply outages in North America. 1Q14 marketing margin is expected to rise QoQ, fueled by a lower ethanol cost (less use of cassava-derived ethanol). Our sensitivity analysis suggests that every 5% decline in the use of cassava-derived ethanol would boost the firm's marketing margin by Bt0.01/liter.

Solar project phase-3 & insurance payout to support 2Q14 profit

As the second-quarter is normally seasonally low for GRM and BCP's refinery has a 46-day maintenance shutdown scheduled, so its 2Q14 core earnings will weaken QoQ. However, we think the commercial operation of solar power project phase-3 (total PPA capacity of 48MW from April onward) and an insurance payout (about Bt500m; for property damage) will mitigate 2Q14 bottom-line slippage. Note also that a further insurance payout for business interruption (BI) is expected to be booked in 2H14 (the amount is still under negotiation). Assuming a market GRM of US$5.5/bbl, we estimate that the firm should receive an insurance payout for BI of about Bt230m.

Ongoing investments to drive medium-term growth

BCP's ongoing investment projects have progressed as planned. The biodiesel phase-2 project (a 125% capacity boost to 810,000 liters/day) will start construction in July 2014; commercial start-up is expected in 3Q15. The 3E (Efficiency, Energy, and Environmental Improvement) program (a 17% refining capacity addition to 140kbd) has EIA certification and is currently being designed. Some 3E projects will be finished in 2014; the full program will be completed in FY18. Management guides that the 3E program is expected to boost EBITDA by Bt2bn/year, which would mean scope for upside to our long-term earnings forecast, as we currently assume a boost to EBITDA of only Bt1bn/year in our model.

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