Moreover, the Company is positioned as a high dividend stock and attractive dividend yields with more than 50% payout ratio. Additionally, the company is in the process of expanding capacity to 175,000 barrels per day.
BUSINESS DESCRIPTION
- Petroleum products
- Petroleum product pricing
- Feedstocks
- Company strategy
The company's products are sold primarily to Chevron and PTT represents approximately 90% of sales by revenue through the Offtake Agreement (Figure 2.3). In addition to the cost savings, the company is also able to reduce water consumption by recycling Low Grade 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 residual fuel oil must be passed through the desulfurized process to meet the 0.5% sulfur requirement. Nevertheless, the OECD-affiliated International Transport Forum has estimated that demand for LSFO and MGO will increase by 2 mb/d in 2020 as shippers switch from fuel oil to fuel oil. This will lead to increase in the price of LSFO and MGO and vice versa for fuel oil.
Oil demand is expected to grow modestly, at an average annual rate of 1.2 million barrels per day. India and China are the main contributors to that specific growth, with their combined consumption accounting for just under 50% of global oil demand. Global oil supply and demand are in balance today, thanks to OPEC's control; a group of an oil supply-demand controller.
World oil supply is expected to add more 2.7 mb/d due to the future additional average oil demand required 1.2 mb/d as well as 1.5 mb/d for lost supply from the US. 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, which produces Light Tight Oil ("LTO") equivalent to 1.4 mb/d, more than half of the need. And the rest; 0.9 mb/d, 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 companies; petroleum, petrochemical and supporting, operates 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 and 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 throughout Thailand.
The company distributes its refined products through its retail stations in more than 1,000 branches across the country. The company has expanded its operations into other businesses, namely solar farms, bioenergy, oil exploration and production, and innovation-oriented businesses. Enhancing national energy security is the company's mission, while investing in new businesses to keep the organization moving forward and ensure sustainability.
Thaioil is the largest refinery in Thailand and the flagship 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 and pipeline transportation.
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 returns, in other words, Thai market consumes a lot in light and medium fuels (Figure 5.2) that the company's refinery is able to meet that country's demand. Because its refinery is the complex cracking refinery that produces more in high value products (light and intermediate fuels). This increases the opportunity for the company to cover that demand and get much higher margin.
The impact on price changes will favor SPRC's financial performance because the distillation of SPRC yields more in light and medium fuels that match IMO requirements. Therefore, for a while the company will earn higher, especially in the year 2020, until demand and supply balance again. SPRC is listed on SETHD, which means its stock has proven to be one of the high yielding stocks for the previous three consecutive years.
SPRC may not be an interesting stock at first glance because the company is just one pure. However, the company is well managed, as well as 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: Discounted cash flow model (“DCF”)
- Value of operating asset Products price formula
- Value of non-operating assets
- The result of discounted cash flow valuation
We assume that the company will use 100 percent of its distilling capacity each year except for the year the company completes the plant. Crude oil, including crude oil in transit, and petroleum products, as well as materials and supplies, are considered inventories of the Company. We use the company's maximum oil storage capacity of 29 days for crude oil and 10 days for products that are from the average historical outstanding inventory.
In addition, trade payables are calculated using 30 days for the payment period as stated in the purchase agreements and other receivables are calculated on a historical average of data at 5% of cost of goods sold. The company's beta is obtained from our regression analysis between the stock price and the specified index as of December 8, 2015. The equity and debt ratios are the company's market capitalization and liabilities as of September 30, 2018, respectively.
The value of non-operating assets is approximately THB 43 million in cash and cash equivalents. We assume that the number of outstanding shares of the company is constant and amounts to 4,336 million shares (Appendix 10); the same amount as shown in 2017 because there is no evidence of future movement from its business plan. Finally, dividing this number by the number of shares outstanding to arrive at a target price of THB 18.68 per common share, which can be broken down into three components, including (1) the value of business assets at THB 20.81 per share (2 ) value of non-operating assets at 0.01 THB per share and (3) value of debts at 2.14 THB per share.
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
For the target price obtained by the DCF valuation method (Phatisaran, 2018), we performed a sensitivity analysis to determine how much each variable affects the SPRC value. Market expansion is considered to be the most important factor in refinery operations, as the overall performance of the refinery is highly dependent on it. Although the company does not need external financing for its next turnaround and capacity expansion in 2019, what if it does, as there is a possibility of insufficient cash in the coffers.
Foreign currency may be another factor for SPRC, because although the company is located in Thailand, its financial statements apply to the US. The constant growth for terminal value can be an important factor because this growth indicates the extent of the company's future performance which means, how much the company can earn in the long term. So we use the sensitivity analysis result of market spread as the target price's upper and lower bounds.
To make a better decision, we use the Football Field Chart, which helps us determine the most suitable price from the overlap area, instead of immediately choosing one price from one method. And finally, we choose the average at 15.9 THB per share as the most suitable SPRC price (Figure 7.5). However, when we looked at the company's historical prices (blue line), we found that the stock prices were higher than our price target, even touching THB 18.0.
INVESTMENT RISK
O2 As a small player, it is difficult for the company to achieve desirable bargaining power feed. Chevron is the main shareholder of the company, so it is able to receive various benefits through the Chevron system, including global. F2 Interest rate fluctuation will not affect the company much due to financial effectiveness.
In addition, PTT, which was previously the company's shareholder, has significant interests in 3 of its main rivals. The company has implemented some management systems to improve operations in a systematic way and also to avoid potential 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 equity liabilities are virtually debt-free. Therefore, the company's financial statements are affected by foreign exchange gain/loss and also translation gain/loss. The current debt burden relative to equity is so low; only 0.4, that the fluctuation of interest rate will not affect the company much.
APPENDICES
- A brief history
- Business structure
- Shareholding Structure
- Organization Chart
- Production process of refinery
- SWOT
- 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 provides the company with a much higher margin by upgrading low-value fuel oil into higher-value transportation fuels. SPRC introduced BLIP to help the company increase earnings and withstand the low GRM cycle. SPRC has one of the lowest cost structures as the company can generate energy for internal use using heat, leading to cost savings.
There are many substitutes for oil and gas, including nuclear power, solar power, wind power and so on. To slow down the effect, they are working hard to promote alternative energy as well as to encourage less oil and gas consumption, for example by using EV cars. This implies that the company only has two main customers, which means, if the company loses these two customers, it will have to work hard to sell out that 90%; otherwise it may become loss in that year.
Therefore, the risk for accessing desired raw material with bargaining power can be minimized as the company is allowed to use a global procurement service from Chevron. Since 2001, the Thai Institute of Directors Association (IOD) in collaboration with the Stock Exchange of Thailand (SET) has continuously assessed corporate governance practices of listed companies for a total of 15 annual periods. The overall 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.
The CGR studies have significantly contributed to the improvement of a paradigm of good corporate governance in Thailand. The assessment criteria were developed by referring to the Organization for Economic Co-operation and Development (OECD) principles of corporate governance and Thailand's Code of Corporate Governance for Listed Companies.
