Energy NEUTRAL (from Overweight) - RHB TradeSmart · field, also in Myanmar, is on schedule to...

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Sector Update, 20 November 2013

Energy NEUTRAL (from Overweight)

Top pick for the sector: PTTGC and IVL

Macro

2

Risks

2

Growth

2

Value

2

Kannika Siamwalla, CFA 66 2862 9744

Licence No.23517 [email protected]

P/E (x) P/B (x) Yield (%)

Dec-13F Dec-13F Dec-13F

Bangchak Petroleum THB32 THB41 10.2 1.3 3.9 NEUTRAL

Banpu THB28 THB37 24.7 0.9 2.9 BUY

Electricity Generating THB130 THB142 10.6 1.0 4.1 NEUTRAL

Esso (Thailand) THB7 THB7 13.6 1.0 2.9 NEUTRAL

Glow Energy THB73 THB69 13.4 2.6 3.8 NEUTRAL

Indorama Ventures PCL THB24 THB26 39.3 1.9 0.8 BUY

IRPC PCL THB4 THB4 19.9 1.0 3.1 SELL

PTT THB308 THB388 7.8 1.3 4.5 BUY

PTT Exploration & Production THB168 THB162 11.0 1.7 3.7 NEUTRAL

PTT Global Chemical THB78 THB90 10.4 1.5 4.3 BUY

Thai Oil THB64 THB75 10.5 1.4 3.8 BUY

Company Name Price Target Rating

Source: Company data, RHB estimates

We downgrade the energy sector from Overweight to NEUTRAL, as we believe this sector will not outperform the market over the next 12 months. Our Top Pick for the sector is PTTGC, which will benefit the most from healthy polyethylene spreads and its potential investment in world-class petrochemical plant in Indonesia. We also like IVL, whose 2014 earnings are set to double y-o-y on higher production volume and improved spreads.

3Q13 earnings rebound; 9M13 in line with expectations. The energy

sector’s 3Q13 earnings rebounded to THB76bn (+175% y-o-y), mostly attributed to higher crude oil prices, improved product spreads and lower forex losses. The energy sector’s 9M13 earnings were THB186bn, stable from last year’s THB185bn and accounting for 74% of our full-year earnings forecast of THB250bn. We maintain our full-year earnings forecasts and assumptions.

Commodity outlook. We expect crude oil prices to trade in a narrow

range of USD100-110/bbl, averaging USD105/bbl from 4Q13 and 2014F onwards (PTTEP TB, NEUTRAL, TP:THB162). The crude oil market remains well-supplied, and we expect more downside risk to crude oil demand than upside. For the refineries, we expect gross refining margin (GRM) to come under pressure as more capacity comes on-line, GRM forecast at USD4-5/bbl. For the aromatics business, paraxylene (PX) spreads will come under pressure as more capacity comes on-line, this will impact all refineries, except for BCP which does not have PX plant. Polyethylene spreads should remain healthy, with more or less a balanced supply and demand situation (PTTGC will benefit the most).

Top pick for the sector is PTT Global Chemical PCL (PTTGC TB,

BUY, TP: THB90), which remains the most active, with world class petrochemical plant planned for Indonesia. We also like Indorama Ventures PCL (IVL TB, BUY, TP: THB26), with earnings set to double y-o-y.

Other news expected for 2014: The utilities sector could see

independent power producer (IPP) bidding for coal-fired power plants by YE14, this should provide more excitement in for the utilities sector - Glow Energy PCL (GLOW TB, NEUTRAL, TP: THB69), Electricity Generating PCL (EGCO TB, NEUTRAL, TP: THB142) and possibly Banpu PCL (BANPU TB, BUY, TP: THB37). Within the PTT group, PTT is expected to list its 2531MW power subsidiary and its affiliate Star Petroleum Refining Company Limited (SPRC) refinery next year.

Oil & Gas 20 November 2013

See important disclosures at the end of this report 2

9M13 Earnings

3Q13 earnings rebound

The energy sector’s 3Q13 earnings rebounded to THB76bn (+175% y-o-y), mostly attributed to higher crude oil prices, improved product spreads and lower forex losses. Utilities saw a 44% q-o-q increase in earnings to THB5.3bn, with BANPU, EGCO and GLOW all recording improved earnings. In exploration and production, PTT Exploration and Production Pcl (PTTEP)’s earnings soared 67% q-o-q to THB18bn, on the back of relatively stable operations, lower tax expense and forex gains. The refineries and petrochemicals earnings rebounded to THB22bn (from THB1.1bn in 2Q13) as operating spreads improved, while refineries recorded stock gains (vs stock loss in 2Q13) and lower forex losses. PTT’s net profits rebounded to THB30.8bn (up 151%) on higher crude oil prices, improved product spreads, significantly higher contribution from its associates, forex gains (vs forex loss in 2Q13) and lower tax expense.

9M13 earnings in line with our expectations

The energy sector’s 9M13 earnings were THB186bn, stable from last year’s THB185bn and accounting for 74% of our full-year earnings forecast of THB250bn. We maintain our full-year earnings forecasts and assumptions. We also keep our average crude oil price (Dubai) projection at USD105/bbl, and expect the crude oil price to stay within the USD100-110/bbl range for the rest of the year. As we expect both crude oil prices and THB/USD to be less volatile and do not foresee large swings in forex and stock gains/losses in the final quarter of this year.

Figure 1: 9M13 earnings in line with our expectations

FYE Dec. 3Q13 2Q13 q-o-q

chg YTD 2013 YTD 2012 y-o-y chg 2013F 2012 y-o-y

growth

Revenue 1,319,598

1,206,931 9%

3,811,503

3,634,669 5%

4,837,919

5,121,605 -6%

EBITDA 108,180

82,205 32%

284,846

258,351 10%

383,491

347,187 10%

EBIT 103,260

84,930 22%

287,350

279,060 3%

383,778

367,150 5%

Net interest expense -

12,471 -

13,221 -6% -

36,749 -

32,424 13% -

35,564 -

46,321 -23%

Assocaites 12,999

4,311 202%

29,372

25,847 14%

34,190

34,965 -2%

PBT 56,009

28,422 97%

141,787

139,641 2%

195,919

188,450 4%

tax -

8,673 -

14,033 -

30,748 -

34,429 -11% -

45,535 -

45,174 1%

Net profit 76,334

27,788 175%

186,101

185,576 0%

250,500

241,203 4%

EPS (Bt) 29

12 149%

71

77 -7%

92

92 0%

EBITDA margin 8% 7% 20% 7% 7% 5% 8% 7% 17%

Source: RHB estimates



Sector outlook

Crude oil prices

Crude oil price is one of our key assumptions for the energy sector.

Crude oil price forecast to average USD105/bbl. We expect crude oil

prices to trade in a narrow range over the next 12 month at USD100-110/bbl. We forecast an average crude oil price of USD105/bbl, although we expect crude oil prices to have more downside risk than upside as there is ample supply in the world market. The additional demand growth forecast is dependent on global economic growth, which the IMF forecasts at 3.6% (as of Oct 2013) and we believe the downside risk will be more on the demand front.

Demand well-supported by ample supply. The International Energy

Agency (IEA) forecasts 2014 world oil demand at 92.1 million barrels per day (mbpd), or an additional 1.1mbpd. This will be supported by non-OPEC supply of 56.4mbpd, with additional supply growth to average 1.7mbpd for 2014, peaking in 2Q14 at 1.9mbpd – which will be the highest growth since 1970s. The US’ current liquid production of 10mbpd is the highest in decades and the US is set to become the largest non-OPEC producer by 2Q14, overtaking Russia. OPEC is expected to supply the balance. According to the EIA, OPEC surplus capacity is expected to increase from 2.2mbpd this year to 3.4mbpd in 2014, which, in our view, should provide sufficient buffer for any unforeseen events.

Downside risk more than upside. The growth in global oil demand is

based on improvements in the global economy. We see downside risk to crude oil demand should global economic activities fall short of expectations. However, Middle East tensions can never be ruled out in any particular year.

Figure 2: Global oil demand in 2014 Figure 3: Non-OPEC supply growth in 2014

Source: TOP Source: TOP



Exploration and production: PTT Exploration and Production PCL (PTTEP)

We are NEUTRAL on PTTEP at the moment, as the share price is trading near our TP of THB162/share.

As we expect stable crude oil prices over the next 12 months, the key operational drivers for this company will be its production volume. We expect its average production volume to increase by 21% y-o-y to 345kboepd (thousand barrels of oil equivalent per day). The major fields that will contribute to the increase in production are:

o Current projects. PTTEP’s Yadana and Yetagun fields in

Myanmar are slated for planned shutdowns for seven days in end-Dec and for seven days at the beginning of Jan 2014. The Zawtika field, also in Myanmar, is on schedule to start gas production by end-2013, whereupon sales should roll in by 2Q14, as the field ramps up production to 300mmscfd (million standard cubic feet per day or c.30kboepd). Montara (Australia) will ramp up production from +10kbpd to 30kbpd in 2014. Algeria 433a & 416b is expected by end of 2014 at 20kbpd.

o Major projects in the pipeline are Mozambique area 1 (+10mtpa

of LNG project, COD 2018/19) and Canadian tar sands project (+60kbpd by 2017). For PTTEP’s Cash Maple LNG project in Australia, the company has not yet decided on how to monetise this project and it could possibly come online well after 2020.

o Bidding for Hess’ assets. PTTEP has officially submitted its bids

for Hess (HESS US, NR)’s shares in production assets in Thailand and Indonesia that the US firm has put up for sale. These four blocks are producing assets capable of 80,000 bpd in total, with Hess’ portion accounting for 30,000bpd overall. It remains uncertain as to how much value this potential acquisition could add to our valuation of PTTEP. This will depend on: i) the acquisition price, ii) the reserve life of each field, and iii) other related factors. However, we view the group’s move to acquire such assets as a good and strategic one, with possible upside to our valuation and TP should it wins the bids.

Figure 4: Projects for the next 12 months




Refineries to improve, petrochemicals stable

Refineries: 4Q13 gross refining margin (GRM) is expected to be well-

supported by winter demand boosting heating oil demand in the Northern Hemisphere and improve bunker demand for year-end festivities. For 2014, it is expected that net additional capacity of 2.2mbpd will be added over the next 12 months. This increase in refined product supply could put a damper on spreads once the additional supply is fully operational. We estimate GRM at c.USD5-6/bbl for 4Q13 amid stronger seasonal demand, while we expect 2014 GRM to be at USD4-5/bbl.

Petrochemicals: For 4Q13, we see product spreads at similar levels to that

of 3Q13. For 2014, we expect a more challenging environment for the aromatics business as more additional capacity is added globally, while the polyethylene (HDPE, LLDPE, LDPE and MEG) prices are still on an upcycle and should see healthy spreads in 2014.

o For aromatics, we project softer paraxylene spreads over the next 12 months amid growing supply. However, this is also supported by demand from purified terephthalic acid (PTA) plants that have come online over the past couple of years. Benzene spreads are expected to be well-supported on limited feedstock due to changes in US feedstock in crackers from naphtha to shale gas, which will increase imports of benzene into the US.

o Polyethylene (which includes HDPE, LLDPE, LDPE and MEG) spreads are expected to remain healthy with high plastic demand for 4Q13. For 2014, overall polyethylene spreads should see continued healthy spreads from 2013 mainly due to global economic recovery and therefore demand. MEG spreads will remain strong due to robust demand from new polyester plants in China starting up and a more tight supply situation in 2014.

Overall, we see stable earnings for most of the refineries and petrochemical companies under our coverage, except for companies that have expansion plans in their pipeline, for which earnings should jump as a result of higher production capacity (eg IVL).

BCP (NEUTRAL, TP: THB41), ESSO (NEUTRAL, TP: THB7), IRPC (SELL, TP: THB4), TOP (BUY, TP: THB75), PTTGC (BUY, TP: THB90), IVL (BUY, TP: THB26)

Figure 5: PX spreads under pressure




Figure 6: BZ spreads to be driven by demand


Figure 7: Polyethylene spreads remain healthy


Figure 8: MEG spreads remain strong




Figure 9: Polyester value chain


Integrated: PTT PCL

We have a BUY recommendation on this stock with our TP at THB388/share.

PTT’s oil marketing and trading, as well as its natural gas transmission businesses should generate stable contributions. However, we expect its natural gas separation business will be negatively affected until its GSP#5 plant can run at full capacity after a lightning incident in August. The plant has been running at 50% capacity since October.

The Government’s cap on liquefied petroleum gas (LPG) and compressed natural gas (CNG) prices remains and will continue to be a burden for PTT until the Government allows these two products to reflect market prices/production costs. We do believe that the Government’s move to increase LPG prices for the household and transportation sector is the first step in the right direction. Although the benefits of the LPG price hike have not yet been passed on to PTT, we believe this will eventually occur – this will be a matter of timing as it is a politically sensitive issue. This should provide some upside to our earnings and valuation.

PTT has several key events in 2014:

o The listing of GPSC. PTT expects to list its power subsidiary

Global Power Synergy Company (GPSC), which has total current capacity of 1357MW. PTT recently injected 694MW in equity capacity into the company from various projects it holds. The plan is that GPSC will have total capacity of 2531MW before it lists in 2014. PTT currently holds 30.1%, with the other shareholders being PTTGC (30.31%) and Thai Oil PCL (TOP TB, BUY, TP: THB75) holding the remaining portion. Assuming current market valuations for EGCO and Ratchaburi Electricity Generating Holding PCL (RATCH TB, NR), a back-of-the-envelope calculation puts the listing of GPSC (at 2531MW) in a range of THB30bn-THB40bn, depending on market valuation/sentiment at the time of listing. How much PTT will divest/how much capital-raising for its future investment remain uncertain at the moment.

o The listing of SPRC. Star Petroleum Refining Company Limited

(SPRC) is a 155kbpd refinery, with PTT holding 36% and Chevron holding a 64% stake. The refinery is expected to list on the market in 2014. Assuming PTT divest its entire 36% stake at the time of the IPO, a back-of-the-envelope calculation puts total proceeds at THB25bn and gains at around THB10bn. This is based on SPRC’s cost booked at THB14.7bn on PTT’s balance sheet, assuming replacement cost of the refinery at a conservative USD15,000/bbl.



Utilities

There is news that once the regulatory agency finalises Thailand’s Power Development Plan (PDP), there may be a new IPP bidding for coal-fired power plants. While the timing of the IPP bidding remains uncertain, it is expected sometime towards 2H14. Should the bidding materialise, we expect more activities for the utilities stocks under our coverage.

We expect GLOW’s 4Q13 net profit to be similar to 3Q13’s c.THB1.9bn, which will bring full-year earnings to THB7.9bn. However, whether GLOW can achieve our full-year forecasts depends on how well its power plant GHECO-One perform in the final quarter – on top of how quickly its Houay Ho (HH) power plant in Laos can come back online. EGCO’s earnings are expected to dip slightly in 4Q13 as its 1,434MW power plant BLCP will be shut down for annual maintenance in 4Q13. We have recently upgraded Banpu to BUY from Neutral. Although coal miners will continue to face a tough and challenging environment, we believe the coal market has bottomed out, with additional supply limited and coal demand seen to normalise. However, the rate and the extent of the recovery remain to be seen.

Banpu (BUY, TP: THB37); GLOW (NEUTRAL, TP: THB69); EGCO (NEUTRAL; TP THB142)

Stock Rating Price Target Price Mkt Cap ----PER (x)---- ----PBV (x)---- ROE (%) Div (%)

THB THB USDm 2013F 2014F 2013F 2014F 2014F 2014F

Energy BANPU Buy 27.75 37.00 251.37 1.83 1.28 0.08 0.08 4.52 28.79

BCP Neutral 32.50 40.60 1,491.64 10.27 8.04 1.29 1.17 12.54 3.91

EGCO Neutral 129.50 142.00 2,272.57 10.62 10.48 0.96 0.91 9.03 4.05

ESSO Neutral 6.75 7.00 778.69 13.58 4.95 0.98 0.87 7.18 2.96

IRPC Sell 3.58 3.70 2,438.58 50.63 20.43 0.96 0.93 1.89 2.03

PTT Buy 311.00 388.00 29,620.16 7.90 7.42 1.31 1.17 16.56 4.44

PTTEP Neutral 169.00 162.00 22,364.25 11.07 10.23 1.74 1.58 15.70 3.62

RATCH Neutral 51.00 43.60 2,465.00 11.75 11.70 1.43 1.37 12.13 5.42

SPCG Buy 20.70 27.80 386.40 13.29 4.78 3.88 2.35 29.19 0.00

TOP Buy 64.25 74.90 4,369.06 10.50 10.03 1.39 1.29 13.28 3.81

GLOW Neutral 73.00 69.50 3,559.65 13.43 12.33 2.59 2.34 19.26 3.77

Petrochemicals IVL Buy 24.80 26.00 3,979.79 40.14 19.71 1.94 1.78 4.82 1.17

PTTGC Buy 79.00 89.80 11,873.30 10.58 10.23 1.54 1.41 14.59 4.27 Source: RHB estimate

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10

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Thai Institute of Directors Association (IOD) – Corporate Governance Report Rating 2013

ADVANC BCP CPF ERW IVL NKI PS ROBINS SCB SNC TCAP TMB UV AOT BECL CPN GRAMMY KBANK NOBLE PSL RS SCC SPALI THAI TNITY VGI ASIMAR BKI CSL HANA KKP PAP PTT S&J SCSMG SPI THCOM TOP WACOAL BAFS BROOK DRT HEMRAJ KTB PG PTTEP SAMART SE-ED SSI THRE TRC BANPU BTS DTAC ICC LPN PHOL PTTGC SAMTEL SIM SSSC TIP TRUE BAY CIMB EASTW INTUCH MCOT PR QH SAT SIS SVI TASCO TTW BBL CK EGCO IRPC MINT PRANDA RATCH SC SITHAI SYMC TKT TVO

2S AYUD CNT GL KKC MBK OISHI SABINA STANLY TK TTCL zZMICO ACAP BEC CPALL GLOW KSL MBKET PB SAMCO STEC TLUXE TUF AF BFIT CSC GOLD KWC MFC PDI SCCC SUC TMILL TWFP AHC BH DCC GSTEL L&E MFEC PE SCG SUSCO TMT TYM AIT BIGC DELTA GUNKUL LANNA MODERN PF SEAFCO SYNTEC TNL UAC AKP BJC DTC HMPRO LH MTI PJW SFP TASCO TOG UMI AMANAH BLA ECL HTC LHBANK NBC PM SIAM TCP TPC UMS AMARIN BMCL EE IFEC LHK NCH PPM SINGER TF TPCORP UP AMATA BWG EIC INET LIVE NINE PPP SIRI TFD TPIPL UPOIC AP CCET ESSO ITD LOXLEY NMG PREB SKR TFI TRT UT APCO CENTEL FE JAS LRH NSI PRG SMT THANA TRU VIBHA APCS CFRESH FORTH JUBILE LST NWR PT SNP THANI TSC VIH ASIA CGS GBX KBS MACO OCC PYLON SPCG THIP TSTE VNG ASK CHOW GC KCE MAJOR OFM QTC SPPT TICON TSTH VNT ASP CM GFPT KGI MAKRO OGC RASA SSF TIPCO TTA YUASA *** PHATRA was voluntarily delisted from the Stock Exchange of Thailand effectively on September 25,2012

A BCH CRANE FPI IT MBAX PICO SGP TBSP TPP WIN AAV BEAUTY CSP FSS JMART MDX PL SIMAT TCCC TR WORK AEC BGI CSR GENCO JMT PRINC POST SLC TEAM TTI AEONTS BLAND CTW GFM JTS MJD PRECHA SMIT TGCI TVD AFC BOL DEMCO GJS JUTHA MK PRIN SMK TIC TVI AGE BROCK DNA GLOBAL KASET MOONG Q-CON SOLAR TIES TWZ AH BSBM DRACO HFT KC MPIC QLT SPC TIW UBIS AI CHARAN EA HTECH KCAR MSC RCI SPG TKS UEC AJ CHUO EARTH HYDRO KDH NC RCL SRICHA TMC UOBKH AKR CI EASON IFS KTC NIPPON ROJNA SSC TMD UPF ALUCON CIG EMC IHL KWH NNCL RPC STA TMI UWC ANAN CITY EPCO ILINK LALIN NTV SCBLIF SUPER TNDT VARO ARIP CMR F&D INOX LEE OSK SCP SVOA TNPC VTE AS CNS FNS IRC MATCH PAE SENA SWC TOPP WAVE BAT-3K CPL FOCUS IRPC MATI PATO SF SYNEX TPA WG *** CIMBI was voluntarily delisted from the Stock Exchange of Thailand effectively on September 25, 2012.

IOD (IOD Disclaimer)

การเปิดเผลผลการส ารวจของสมาคมส่งเสริมสถาบันกรรมการบรษิัทไทย (IOD) ในเรื่องการก ากับดูแลกิจการ (Corporate Governance) นี้เป็นการด าเนินการตามนโยบายของส านักงานคณะกรรมการก ากับหลักทรัพย์และตลาดหลักทรัพย์ โดยการส ารวจของ IOD เป็นการส ารวจและประเมินจากข้อมูลของบรษัทจดทะเบียนในตลาดหลักทรัพย์แห่งประเทศไทยและตลาดหลกัทรัพย์เอ็มเอไอ ที่มีการเปิดเผยต่อสาธารณะและเป็นข้อมูลที่ผูล้งทุนทั่วไปสามารถเข้าถงึได้ ดังนั้นผลส ารวจดังกล่าวจึงเป็นการน าเสนอในมุมมองของบุคคลภายนอกโดยไม่ได้เป็นการประเมินการปฏิบัติและมิได้มีการใช้ข้อมูลภายในในการประเมิน

อนึ่ง ผลการส ารวจดังกล่าว เป็นผลการส ารวจ ณ วนัที่ปรากฎในรายงานการก ากับดแูละกิจการบริษัทจดทะเบียนไทยเท่านั้น ดังนั้นผลการส ารวจจึงอาจเปลี่ยนแปลงได้ภายหลังวันดังกล่าว ทัง้นี้บริษัทหลักทรัพย์ อาร์เอสบี โอเอส เค จ ากัด (มหาชน) มิได้ยืนยันหรือรับรองถึงความถูกต้องของผลการส ารวจดงักล่าวแต่อย่างใด

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