Thai Oil (TOP)

Refinery and aromatics businesses to remain bright until 2014 BUY

Thai Oil Plc (TOP)

GRM remains on an uptrend & aromatics spread strengthens, benefiting TOP

According to the analyst meeting yesterday, TOP's management is confident

about a positive outlook of the refinery and aromatics businesses in 2013-2014,

which is in line with our previous forecast. For the refinery business, gross

refinery margin (GRM) is projected to remain in an uptrend in 1H13 due to

seasonal effects: winter in 1Q13 and US driving season in 2Q13, which would

help boost demands for finished oil. There is also a support from maintenance

shutdowns of many refineries in Asia totaling by 3 million bbls a day during

March - May 2013, particularly April in which there will be the largest

maintenance shutdown of 4.8% of total production capacity of the region, which

is larger than total maintenance shutdowns in 2012. In addition, the GRM is

projected to remain in an uptrend until 2014 from net additional supply which is

standing low at only 200,000 bbls a day compared with the demand growth of 1

million bbls a day because there might be permanent shutdowns of many

refineries in 2014. Likewise for the aromatics business, prices and spreads of

aromatics remain very strong in 1H13 because a demand for the main product,

Px, in Asia are still larger than the supply, with the growth of 7% a year

between 2012-2016. Moreover, in the short term there is also a benefit from a

maintenance shutdown of aromatics plants with total production capacity of

600,000 tons a year in January - May 2013. In the long run, demands for

downstream products tend to increase following the economic recovery, which

would also help increase demands for upstream products like Px and Bz. This is

a positive factor for product spread in 2014, making it remain outstanding.

Furthermore, considering TOP's investment strategy, the company aims to

create strength for its current businesses as well as expand investment overseas

mainly in 3 countries: Indonesia, Vietnam, and Burma, which would be an addon

for the company in the future.

Remarkable profit surge foreseen in 1H13

We project 1Q13's net profit to rebound significantly from the following

contributions. 1) GRM is anticipated to increase from 4Q12 on seasonal effect

and maintenance shutdowns of many refineries in the region at the end of 1Q13.

At the same time, spreads of Px and Bx are projected to remain high. 2) The

company would be able to gradually exercise BOI tax privilege, with total tax

privilege of B2.9bn to be exercised in 2013. 3) There will not be extraordinary

expenses like it was in 4Q12. Overall, business outlook in 2013 is still on a

bright side. For the refinery business, average GRM is projected to still stabilize

at US$4.5-5.5/bbl. Although new refineries will gradually start their commercial

runs since 2H13, there will also be permanent shutdowns of some refineries

such as in Japan and Australia as well as planned and unplanned maintenance

shutdowns of refineries during the year. Accordingly, demand and supply of

refineries will be in balance. For the aromatics business, increasing demands for

Px from a new PTA plant will be a main factor supporting the product price to

stabilize at a high level. For Bz, increasing natural gas production from shale gas

is a key factor to depress overall Bz supply and strengthen the product price.

BUY. PER still lower than regional average. Interim dividend yield is 3%

2013's fair value, DCF, is B91.49/share (from B90). We reiterate our BUY

recommendation. Current PER in 2013 is standing at only 9.5x, lower than the

sector's average of 13-14x. On the contrary, ROE in the next 2 years is

projected at 14%, higher than the regional average of 10-11%. Additionally,

TOP announced 2H12's dividend at B2.2/share or interim dividend yield of 3%.