4Q13 earnings contraction expected; better numbers projected for 1Q14
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 earning will prove more resilient than its peers, given its unique business model. Its valuation remains undemanding—an FY14 PER of 7.6x, discounts its long-term average of 10.2x and to the regional mean of 10.7x—and it offers an FY14 dividend yield of 6.0%, far above the Asian refinery average of 3.4%. Weaker margins and FX loss to squeeze 4Q13 earnings, but…
We have revisited our BCP earnings model; we now expect the firm to post a 4Q13 net profit of Bt554m, down by 52% YoY and 59% QoQ. Stripping out an assumed FX loss of Bt540m, an inventory gain of Bt159m and a gain on oil hedging of Bt240m, 4Q13 core earnings would be Bt695m, down 32% YoY but up 329% QoQ. Our revised numbers are slightly below our previous projection, due to a deeper FX loss expectation. As such, we have trimmed our FY13 net profit projection by 3% to Bt4,519m.
The key factors behind the assumed 4Q13 earnings contraction were: 1) weaker market GRM (down by 63% YoY and 18% QoQ to US$3.9/bbl), 2) slimmer marketing margin (down by 23% YoY and 4% QoQ to Bt0.51/liter), 3) a lower QoQ inventory gain ($1/bbl against $3.2/bbl in 3Q13) and 4) a smaller YoY oil hedging gain ($0.8/bbl against $1.2/bbl in 4Q12). Note that the solar power unit will make a bigger QoQ and YoY profit contribution in support of 4Q13 earnings. Furthermore, the crude run increased 19% YoY (stable QoQ) to 101KBD, while marketing sales volume rose by 10% YoY and 8% QoQ to 437m liters/month. …QoQ profit growth expected for 1Q14
We 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. The key driver will be greater market GRM—brought about by seasonally high demand for refined petroleum products during the first-quarter—coupled with a supply outage due to freezing cold weather in North America. The Singapore GRM in 1Q14-to-date has jumped 50% QoQ (albeit down 27% YoY) to US$6.1/bbl. Moderate impact from baht depreciation
As BCP has dollar-denominated debt totaling about US$200m, baht depreciation would have moderate impact on its earnings. If the baht were to depreciate by Bt1 against the US dollar, the firm would see an FX loss of about Bt200m. Moreover, additional FX losses could be incurred from crude purchases during the quarter.