Thai Oil

Favorable outlook for refinery reaffirmed BUY

Thai Oil Plc (TOP)

BUY maintained but growth looks less exciting. We maintain our BUY on TOP after

the 2012 results review. We are positive on the outlook of the oil refining business for

the next two years and aromatics for 1H13 before new capacity hits margin in 2H13.

BoI tax exemption for new projects that lessen environmental impact could provide

upside to our forecast. We maintain our TP of Bt76/share, based on 1.6x PBV for 2013,

slightly lower than its historical average 1.7x PBV due to unexciting net profit growth.

Outlook for GRM remains strong. Outlook for the refinery business is expected to

remain favorable in the next two years due to tight supply as a result of refinery

turnarounds and the permanent closure of inefficient refineries in Europe and Japan.

This could offset additional capacity of at least 1.5mbpd during the next two years.

According to industry consultant FACT, net additional capacity in 2013F will be similar

to 2012 at ~1mb/d+, vs. 800-900kb/d additional demand. Things are more encouraging

in 2014F when net additional capacity is expected at only 100-200kb/d, vs. incremental

demand of nearly 1mb/d. We estimate TOP's market GRM to be flat YoY at US$5.3/bbl

and increase slightly to US$5.6/bbl in 2014F.

Tight supply to continue to favor aromatics spread. Prospects for the aromatics

business also is positive for at least 1H13 due to tight supply brought by maintenance

shutdowns. Chemical Market Associates Inc (CMAI) expects PX production loss in Asian

markets of more than 600kt in 1H13 from maintenance shutdowns while demand for

PX will continue to grow by 6.9% p.a. during 2011-15, making the region - mainly China

- a net importer of PX. The key risk to aromatics is the uncertainty of the global

economy, which could result in volatile demand for PX and benzene derivatives. We

assume flat PX spread at US$450/t for the next two years.

Fiercer competition continues to hurt lube base margin. Of its three key

businesses, lube base oil will be the most affected by higher competition brought by

excess supply in the industry. Though product spread has hit a two-year low, this will

be partly offset by higher demand for bitumen in Asia for road construction and

repairs in two key markets, China and Indonesia.

More tax privileges to be booked. BOI tax incentives for new projects that lessen

environmental impact is upside risk to our forecast. From the total Bt4.8bn tax

exemption approved by BoI, TOP claimed Bt1.6bn during 2011-12, leaving Bt3.2bn to be

redeemed. Management expects Bt2.9bn could be exempted in 2013F. This implies

profit before tax for the refinery business of ~Bt14.5bn, which is in line with our

expectation. This tax exemption could lower its effective tax rate to ~10percent from 12% in

2012. Management also said the BOI is looking at approving Bt10bn more of its

investment for more tax privileges.