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Bangchak Petroleum

Diversifying, but still focusing on green energy BUY

Bangchak Petroleum Plc (BCP)

Still a BUY with TP of Bt44. We continue positive on BCP's earnings and business outlook following the latest analyst meeting. In the near term, earnings look more sustainable, underwritten by its solar power business, plus it should record better profit from its oil refining business after the major turnaround in 2014F. In the medium term, the completion of the efficiency improvement project in 2018F will lift profit further and this will add to the more diversified profit from E&P and green energy arenas. Valuation-wise, the current P/E of 9x in 2014F looks undemanding compared with 13.2x for regional peers. PTT's potential divestment could be a near-term overhang for share price, although the impact on BCP's operations would be limited. Our BUY rating with TP of Bt44 is unchanged.

Looking for new investment to achieve EBITDA target. Management reports that its investment projects are progressing as planned, with total value of Bt33bn. One-third of this amount has been spent this year and the remaining will be spent on its 3E project for efficiency improvement, for upgrading and for normal capex over the next four years. Management continues to look for new opportunities such as the recent investment in the upstream business (Nido), setting additional capex of Bt5bn/year to meet the target EBITDA of Bt25bn by 2020. It will raise capex from this Bt5bn if needed to get in on a good opportunity.

Nido Petroleum to be its platform for E&P. BCP says its recent investment in E&P is a strategic investment, with Nido as its E&P platform in the future. More investment in Nido is likely via an off-market tender offer that could cost BCP Bt3.6bn to take 100% interest. The company plans to adopt a more offensive stance in this business to diversify from oil refinery, planning to get into operations as well when the know-how is in place, although E&P will continue to be only for diversification not its key business. Crude supply from Nido will not be used by BCP as it does not meet BCP's refinery specifications. It will be sold instead to refineries in Korea and in North Asia.

Divestment by PTT will not affect BCP's operations. Management reaffirms that a divestment by PTT would not affect its operations, since most of its interactions with PTT are on a commercial basis. BCP has prepared for this divestment for some time as it is PTT's only non-core asset and its business strategy is not directed by PTT. A portion of local crude currently used by BCP is procured from E&P operators other than PTT group. BCP's crude procurement will be more flexible after the completion of its efficiency improvement and upgrading project in 2018.

Green energy remains key. BCP will continue its focus on green energy in the long term to add to its current operations in solar power and bio-fuel. Investment in other renewable energy sources such as a waste power plant, biomass and biogas is under intensive study to become other good earnings drivers in addition to oil refining and marketing, especially after 2018.

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