This can increase the opportunity for the company to cover that demand and get much higher margin. In addition, the company is expanding the capacity to 175,000 barrels per day.
BUSINESS DESCRIPTION
- Petroleum products
- Petroleum product pricing
- Feedstocks
- Company strategy
The company's products are mainly sold to Chevron, and PTT accounts for approx. 90% of sales in relation to turnover through the divestment agreement (figure 2.3). In addition to the cost savings, the company is also able to reduce water consumption by recovering low-quality condensate at the sulfur plant.
MACROECONOMIC ANALYSIS
- The world and the country’s GDP
- Inflation rate
- Exchange rate forecast
- SPRC’s stock price versus SET sentiment
Global inflation is expected to average 3.5 percent over the next five years. As the chart (Figure 3.4) shows, SPRC's share price has generally moved in line with market sentiment since its IPO, especially over the course of 2018.
INDUSTRY ANALYSIS
- Shale oil
- IMO 2020
- The coming of electric vehicle (“EV”)
- Demand and Supply
- Crude oil sentiment World oil demand
- Refining product sentiment
That remaining fuel oil must undergo a desulfurization process to meet the 0.5% sulfur requirement. This will lead to an increase in the price of LSFO and MGO, and conversely of fuel oil. That's because many people are very concerned about global warming, one of the major world problems caused by carbon dioxide.
Oil demand is expected to grow modestly, at an average annual rate of 1.2 million barrels per day. The International Monetary Fund (“IMF”) has forecast global economic growth at 3.7% in the first part of its five-year projection. Global oil supply and demand are in balance today, thanks to OPEC's control; a group of an oil supply-demand controller.
Global oil supply is expected to increase by a further 2.7 million barrels per day due to future additional average oil demand that will require 1.2 million barrels per day, as well as 1.5 million barrels per day for the supply that from the US is lost. Based on production capacity and geopolitics, most of the future oil supply is expected to come from non-OPEC countries, dominated by the United States, where Light Tight Oil ("LTO") is produced at a rate of 1.4 million barrels per day, more than half of the need. And the rest; 0.9 million barrels per day is generated by the OPEC+ alliance (cooperation agreement between OPEC, led by Saudi Arabia, and non-OPEC partners, led by Russia).
COMPETITION ANALYSIS
- IRPC Public Company Limited
- Esso (Thailand) Public Company Limited
- Bangchak Corporation Public Company Limited
- Thai Oil Public Company Limited
There are three businesses; petroleum, petrochemical and supporting, operating under IRPC in its own Rayong Industrial Zone. The company's main businesses include a complex refinery with a maximum capacity of 177,000 barrels per day, and aromatics plant as well as solvent production unit. The company also has direct commercial sales of petroleum products in the industrial, wholesale, aviation and marine sectors, and service stations around 580 across Thailand.
The company distributes its refined products through its own retail stations in more than 1,000 branches across the country. The company has expanded its operations to other businesses, namely solar power plants, bioenergy, oil exploration and production, and innovation-oriented companies. Strengthening national energy security is the company's mission, while investing in new businesses to advance the organization and ensure sustainability.
Thaioil is the largest refinery in Thailand and the main refinery under the PTT group, with a refining capacity of 275,000 barrels per day, single-site refinery. There are three main production units which are crude distillation unit, upgrading unit and quality improvement unit. The company also operates in other related businesses such as ethanol production, power generation and marine transportation and pipeline.
INVESTMENT SUMMARY
- Growth opportunity from country demand
- The company strengths
- IMO 2020 enhances SPRC’s main product values
- Attractive dividend
SPRC cannot compete in the first aspect as it only occupies 13% of the country's total market share (Figure 5.1), but the company is able to provide the market with favorable product yields, in other words, the Thai market consumes a lot in light and medium. fuels (figure 5.2) that the company's refinery is able to meet the country's demand for. Because its refinery is the complex cracking refinery which yields more in high value products (light and medium fuels). This increases the company's ability to meet this demand and get a much higher margin.
The impact on price change will benefit SPRC's financial performance because the distillation of SPRC yields more light and medium fuels that meet the IMO's requirement. Therefore, the company will win higher for a while, especially in the year 2020, until the supply and demand go to equilibrium again. SPRC is listed on SETHD, which means that its stock has been proven to be one of high dividend stocks for the previous three consecutive years.
SPRC may not be an interesting stock at first glance because the company is just one pure refinery. However, the company is well managed and has robust financial statements with a low cost structure, minimal debt and no strategic plan for major investments after 2019. The company therefore deserves to trade at a premium as it has potential to continue with a high offering. and attractive dividend yields of more than 50%.
VALUATION
The first part of valuation: Relative Valuation
- Conducting P/E, P/BV and EV/EBITDA band
- A group of peers
- The result of relatives valuation
To obtain market capitalization, we take the number of shares as of December 31, 2017 from each company's financial statements and multiply it by their closing price as of March 30, 2018, retrieved from SETSMART. We assume that the number of outstanding shares of the company is constant at 4,336 million shares (Appendix 10); the same amount as in 2017, as there is no evidence of future changes to the business plan. Finally, that number is divided by the number of outstanding shares to receive a target price of 4 THB.
Note that we use profit from operations (recurring profit) to find target prices, which means that both profit and EBITDA are excluded the impact of share gains/losses and exchange rates. The abnormal situation causes the expected numbers to be lower than what the numbers should be, resulting in low target prices. From our point of view, this set of target prices received from the 2019 projection figure may not reflect the intrinsic value of the company.
In order to find reasonable target prices for the investment decision, we therefore decide to use normalized numbers calculated from the profit obtained from ordinary business years only. The new set of target prices calculated using the same method as previously stated are shown in Table 7. This method may not be accurate, but it gives us more reasonable target prices and it is better to use the new set of target prices to make an investment. decision in the next part.
The second part of valuation: Conclusion
- Drivers of volatility in earnings: sensitivity analysis
- The most significant factor: spider chart
- The boundary of each multiples
- The most appropriated price: Football Field Chart
Market spread is considered to be the most important factor in the refinery operations as the overall performance of the refinery is highly dependent on it. Although the company does not require external financing for the next turnaround and capacity expansion in 2019, what if it does require it as there is a possibility of insufficient cash available. Currency rates may be another factor for SPRC because even though the company is based in Thailand, its financial statements use the U.
The constant growth for the terminal value can be an important factor because this growth shows the future performance rate of the company which means how much the company can earn in the long run. In the case of three multiples derived from relative assessment; P/E, P/BV and EV/EBITDA, gives us three different target prices. To make a better decision, we apply the football field chart to help us determine the most suitable price from the overlap area instead of immediately choosing a price from a method.
We use Football Field Chart because the chart summarizes all four stock prices, resulting from DCF and relative valuation, and visually shows an average between the range of our four target prices. And finally, we choose the average at THB 15.9 per share, as the most suitable price of SPRC (Figure 7.5). However, when we look at the company's historical prices (blue line), we found that the stock prices have been higher.
INVESTMENT RISK
O2 As a small player, it is difficult for the company to obtain the desired feed with bargaining power. Chevron is the company's largest shareholder and can therefore benefit from various benefits through Chevron's system, including worldwide. F2 The fluctuation of interest rate will not affect the company much due to effective financial policy.
In addition, PTT which was once a shareholder of the company has significant interests in 3 of its main rivals. The company has implemented several management systems to systematically improve its operations and avoid possible business interruptions. With 13% of total capacity in Thailand, the company is not a major player with bargaining power in the market.
Thanks to the company's healthy financial performance, its current debt to equity is almost debt-free. Therefore, the company's financial statements are affected by exchange rate gain/loss and also translation gain/loss. Its current debt to equity is so low; only 0.4, that interest rate fluctuation will not affect the company much.
APPENDICES
- A brief history
- Business structure
- Shareholding Structure
- Organization Chart
- Production process of refinery
- SWOT Strength
- Five force analysis
- Statement of comprehensive Income including projection
- Statement of cash flow including projection
- Statement of financial position including projection
- The proportion of balance sheet’s components including projection
- Common size analysis
- Trend analysis
- Assumptions for statement of income
- Corporate governance
- List of refining acronym
A complex cracking refinery gives the company a much higher margin by upgrading low-value fuel oil to higher-value transportation fuels. SPRC has implemented BLIP that helps the company to increase its earnings as well as withstand low GRM cycle. SPRC has one of the lowest cost structures as the company is able to generate power for internal use by using heat, leading to cost savings.
There are many substitutes for oil and gas, including nuclear, solar, wind, and so on. This implies that the company only has two main customers, which means that if the company loses these two customers, it has to work hard to sell off the 90%; otherwise it may incur losses in that year. Therefore, the risk of access to desirable raw materials with bargaining power can be minimized as the company is allowed to use Chevron's global procurement services.
Moreover, PTT, Thailand's largest oil and gas company, has material interests in three of those five competitors. Since 2001, the Thai Institute of Directors Association (IOD), in collaboration with the Stock Exchange of Thailand (SET), has continuously assessed the corporate governance practices of listed companies for a total of 15 annual periods. The general survey results were published in the reports entitled “Corporate Governance Report of Thai Listed Companies (CGR)” and disclosed to all listed companies and related parties in the capital market.
CGR's studies have contributed significantly to the improvement of the good corporate governance paradigm in Thailand. The assessment criteria have been developed with reference to the Organization for Economic Co-operation and Development (OECD) Principles of corporate governance.
