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UBS Investment Research
Asia Refining & Petrochemical
Opportunity re-emerging
Attractive valuations with improving fundamentals
We reiterate our positive view on the Asia refining and petrochemical sector. After
the recent share price corrections, we think refining and petrochemical stocks are
trading at more attractive valuations (13.0x/11.1x 2011E/2012E PE), while refining
margins and petrochemical spreads have further improved YTD and now exceed
our estimates.
Raise refining margin forecasts
Refining margins in Asia have been stronger than we expected due to strength on
the demand side and unexpected supply disruptions. The average complex refining
margin YTD is up 26% QoQ and 35% YoY. We have raised our 2011/12/13
refining margin forecasts from US$4.35/4.40/4.45/bbl to US$5.50/5.75/6.00/bbl to
reflect stronger-than-expected product demand.
Raise spread forecasts for polyester chain
Cotton prices have risen a further 30% YTD, and spreads of polyester feedstocks
(PX, PTA and MEG) have exceeded our estimates and significantly outperformed
most other petrochemicals over the past two quarters. PX and MEG spreads have
more than doubled from the Q310 level. We have revised our spread forecasts for
PX/PTA and MEG upwards.
Most preferred: Thai Oil, GSH, Essar Oil, FCFC, NYP, PCG
Among Asian refining stocks our preferred picks are Thai Oil in Thailand, GS
Holdings (GSH) in Korea, and Essar Oil in India. Among petrochemical stocks,
Formosa Chemicals & Fibre (FCFC) and Nan Ya Plastics (NYP) in Taiwan and
Petronas Chemicals Group (PCG) in Malaysia are our preferred picks. We remain
Neutral on Formosa Petrochemical (FPCC), Reliance Industries, and PTT
Aromatics (PTTAR).
Executive Summary
Refining: margins beat our expectations
In 2010, the average complex refining margin increased 23% to US$4.5/bbl,
which is 8% above our previous estimate of US$4.15/bbl. Refining margins
have expanded further in Q111, with the YTD average complex refining margin
reaching US$6.9/bbl, up 26% QoQ and 35% YoY.
We have revised our 2011/12/13 refining margin forecasts upward from
US$4.35/4.40/4.45bbl to US$5.50/5.75/6.00bbl to reflect stronger-than-expected
product demand. We believe refining margins in Asia should continue to recover
in 2011-12 given the limited new capacity coming on stream. We expect
demand growth to outpace supply growth in 2011-12 and utilisation rates to
gradually recover from 87.6% in 2010 to 88.9% in 2012.
Petrochemicals: polyester chain outperforming
As pointed out in our report Asia Refining & Petrochemical Sector:
Fundamental improvements ahead, published on 24 November 2010, the
polyester chain is one of our three major investment themes for 2011, given our
view that strong cotton prices should continue to drive up prices of polyester
filaments as well as their upstream feedstocks MEG, PTA, and PX. Cotton
prices have increased a further 30% YTD, and spreads of polyester feedstocks
have significantly outperformed most other petrochemicals over the past two
quarters.
We have revised upward our petrochemical spread assumptions, mainly for
polyester feedstocks. We now expect the average MEG-ethylene spread to reach
US$350/tonne in 2011, up from our previous estimate of US$190/tonne. For the
PX-naphtha spread we raise our estimate from US$370/tonne to US$550/tonne
for 2011 and for the PTA-naphtha spread, we raise our 2011 estimate from
US$503/tonne to US$605/tonne.
Most and least preferred stocks in Asia
We reiterate our positive view on the Asia refining and petrochemical sector.
For refining stocks in the region, we prefer GS Holdings in Korea, Thai Oil in
Thailand, and Essar Oil in India. For petrochemical stocks, we prefer FCFC and
NYP in Taiwan, and PCG in Malaysia.
GS Holdings is our top pick in the Korea oil and chemical space. The stock
is trading at the lowest valuations among refining companies in Asia but has
ROE in line with the industry average. In addition to strong refining margins
and PX spreads, we think the potential listing of GS Retail could be another
positive catalyst for GS Holdings in Q311.
Thai Oil (TOP) is our top pick in the Thailand energy sector given its strong
forecast earnings growth, solid FCF yield, and LPG pricing reform in
Thailand. We think its BTX capacity expansion in 2012 should drive up
medium-term earnings growth.
Essar Oil is our top pick in the Indian oil and gas space. We believe the
stock is trading at attractive valuations at only 7.7x FY13E PE, and we see
its timely refinery upgrade to higher complexity and throughput—likely by
mid-2011—as a key trigger for the share price.
FCFC is our top-pick in the Taiwan petrochemical space. The stock is
trading at the lowest valuations among petrochemical companies in Asia but
with above average ROE and the highest 2011E cash dividend yield. The
company is a leading PX/PTA producer in Asia and we expect it to benefit
from the strong polyester demand.
PCG is our top pick in the Malaysia petrochemical space. We believe PCG
is well positioned in Southeast Asia to profit from rising petrochemical
prices and a stable feedstock cost. In addition to its exposure to PX and MEG,
strong urea and methanol prices (up 52% and 44%, respectively, since July
2010) should be key earnings drivers in the near term.
Table 1: Highlights of petrochemical stocks under our coverage
Company Rating Key highlights
FCFC Buy We maintain our Buy rating on FCFC and raise our price target from NT$115.00 to NT$125.00 based on our new petrochemical spread estimates. We
believe FCFC is best positioned to profit from the rising polyester demand in Asia given its large-scale and integrated PX/PTA production capacity. In
addition, FCFC is trading at an attractive valuation of 10.8x 2011E PE. We forecast 18% bottom line growth this year and c7% cash dividend yield.
Given its strong cash flow, FCFC generates the highest cash dividend yield among petrochemical companies in Asia, while it continues to expand
capacity overseas. It plans to double its PTA, ABS, and PS capacity in China by 2013, which we believe will further support the company’s mediumterm
growth outlook.
FPC Buy We reiterate our Buy rating on Formosa Plastics (FPC) and raise our price target from NT$110.00 to NT$115.00 as we factor in forecast higher cash
dividend income from NYP and FCFC as well as stronger equity investment income from FPCC based on our new regional refining and petrochemical
spread assumptions. We expect FPC to deliver another year of strong core earnings in 2011. Management expects its carbon fibre business to turn
profitable in H111 on rising ASP and higher utilisation rates. For its specialty chemicals, the AN-propylene spread has expanded a further 10% so far in
Q111. In addition, PP-propylene spreads have more than doubled from Q310 to Q111. We estimate a 6% cash dividend yield in 2011 given its strong
earnings recovery in 2010, with a high cash payout ratio of 80%. Meanwhile, FPC is still investing overseas (new gas-based crackers in the US,
downstream PVC, EVA, SAP, AA/AE plants in China, and a steel mill in Vietnam) for its long-term growth.
NYP Buy We maintain our Buy rating on NYP and raise our price target from NT$84.00 to NT$98.00 based on our new regional petrochemical spread forecasts.
We believe NYP is well positioned in Asia to profit from recovering MEG spreads and stronger polyester demand given its leading market position for
both products in terms of operational scale. We expect another year of strong earnings in 2011 driven by expanding MEG spreads and higher
utilisation rates on no major maintenance shutdown this year. In addition to forecast core earnings improvement, stronger equity income from FPCC
and Nanya PCB should support NYP earnings in 2011.
PCG Buy We reiterate our Buy rating on PCG and raise our price target from RM7.30 to RM7.60 based on our new regional petrochemical spread forecasts. We
believe PCG is well positioned in Southeast Asia to profit from rising petrochemical prices and a stable feedstock cost. PCG has 500K tpa PX and
380K tpa EG capacity in Malaysia. We estimate that these two products together will account for 11% of its total shipments in FY11. Given the strong
PX/MEG prices since H210 (MEG price up 79% and PX price up 95% since July 2010), we expect improving earnings momentum in the near term.
Urea and methanol are more of an earnings driver for PCG as we estimate these two products together will account for a 42% of its total shipments in
FY11, and the prices of urea and methanol have increased 52% and 44%, respectively, since July 2010.
FENC Buy We maintain our Buy rating on Far Eastern New Century (FENC) and raise our price target from NT$54.00 to NT$56.00 based on our new regional
petrochemical spread forecasts. FENC is a leading polyester producer in Asia. Its PTA capacities not only fully supply its own polyester production but
50% is sold to outsiders. We believe FENC is well positioned to benefit from the improving spreads of polyester-PTA-MEG and PTA-PX. FENC will add
100k of capacity for recycle products, thus increasing polyester capacity in Taiwan 10% in 2011. FENC sold 908 ping of land to Far Eastern Hospital at
NT$477,000/ping, which will contribute NT$331m in disposal gains in Q111. Management plans to sell another 1,000 ping of land in 2011, which we
estimate would bring 2% upside to our earning estimates. The remaining development benefits of California Dreaming (NT$1.6bn), will be booked in
full in 2011.
Source: UBS estimates
Table 2: Highlights of refining stocks under our coverage
Company Rating Key highlights
TOP Buy We reiterate our Buy rating on TOP and raise our price target from Bt88.00 to Bt92.00 following our higher regional refining margin and
petrochemical spread forecasts. We believe TOP is well positioned to deliver strong earnings growth in 2011, driven by continued recovery in middle
distillate spreads; stronger PX-naphtha spread and a narrower net loss on LPG products post Thailand's LPG reform in January 2011. Longer term,
TOP's BTX capacity expansion should further support its earnings growth in 2012E. We estimate 15% FCF yield in 2011 and believe a higher
dividend could be the next positive catalyst for the share price.
GSH Buy We maintain our Buy rating on GSH and raise our price target from Won80,000 to Won95,000 based on our new Asia refining margin and
petrochemical spread assumptions. We expect GSH to deliver another year of strong earnings in 2011, given improving refining margins and
petrochemical spreads. Another key driver of earnings in 2011 is likely to be the newly completed refining upgrade unit, which began operations in
October 2010. GS Caltex should have another upgrade unit start running in 2013, contributing further to its refining earnings. We believe the key
catalysts for GSH’s share price include: 1) strong earnings momentum in the near term, given the improving refining margin in winter and PX spread
expansion on stronger demand, plus contribution from the new upgrade unit in Q410; 2) positive developments on the GS Retail listing; and 3)
improving cash dividends.
SKI Buy We reiterate our Buy rating on SK Innovation (SKI) and raise our price target from Won220,000 to Won245,000 based on our new regional refining
margin and petrochemical spread estimates. We believe SKI is trading at attractive valuations given its solid forecast earnings growth in 2011. We
are positive on SKI’s near-term earnings momentum given: 1) lube base oil margins should recover starting from Q111; 2) refining margins have
improved further in Q111; 3) PX-naphtha spreads are even higher in Q111; and 4) olefin/polymer capacity returning to normal operations after the
major shutdowns in Q410. In addition, the potential disposal gains from selling its E&P assets could be a share price catalyst for SKI in the next three
to six months.
S-Oil Buy We maintain our Buy rating on S-Oil and raise our price target from Won110,000 to Won135,000 based on our new regional refining margin and
petrochemical spread forecasts. We believe S-Oil is well positioned in Asia to deliver strong earnings growth in 2011 on recovering refining margins
and petrochemical spreads given its complex refining capacities and new petrochemical capacities coming on stream in Q211. S-Oil will add a new
900K tpa PX plant in Q211, and its total PX capacity should reach 1.6mn tpa (up 128%) in Q211. We expect the capex cycle to come down
significantly for S-Oil after the expansion over the past three years, which should also lead to stronger cash yield in 2011.
Essar Oil Buy We reiterate our Buy rating on Essar Oil, which is our top pick in the Indian oil and gas space. We believe the stock is trading at attractive valuations
at only 7.7x FY13E PE. We believe its timely refinery upgrade to higher complexity and throughput will be a key trigger for the share price. Essar Oil
will upgrade its refinery capacity to 375,000 bpd by mid-2011, which will translate to increase on Nelson complexity from 6.1 to 11.8. Our checks and
interaction with management lead us to believe the timeline will be met, as will the commercial production of coal bed methane at Raniganj. We base
our price target of Rs175.00 on a sum-of-the-parts valuation.
Reliance Neutral We maintain our Neutral rating on Reliance with a price target of Rs1,050. Reliance’s earnings are led by the upstream, petrochemical and refining
segments, which contributed 24%, 38% and 38% to its operating profit in Q3 FY11, respectively. We expect modest improvements in refining and
petrochemical margins going forward but expect flat gas volumes till FY13. KGD6 volumes declined from a peak of 57mmscmd to the current levels
of 43-45. RIL has given no volume guidance but the current production drop suggests that a sharp ramp up to 80mmscmd in 2012 is unlikely. We are
therefore cautious on peak production from the KG D6 block. We expect gas production at 60mmscmd in FY13 but consensus is still at 80, so
earnings forecast downgrades are likely in our view. Despite our positive view on refining and petrochemical operations, we expect the upstream
segment to drag earnings down.
PTTAR Neutral We reiterate our Neutral rating on PTTAR as the stock is fully valued in our view. We raise our price target from Bt39.50 to Bt42.00 following our
higher regional refining margin and petrochemical spread forecasts. The stock is trading at 16.5x 2011E PE, which is at a premium to its peers in the
region. We believe the share price has already reflected the company’s high exposure to strong PX price. In addition, we think PTTAR's volume
growth outlook is weaker than peers, and its relatively high net gearing ratio implies lower long-term growth opportunities than peers. However, a
potential merger between PTTAR and another PTT group company could be a positive for PTTAR in the near term.
FPCC Neutral We maintain our Neutral rating on FPCC and raise our price target from NT$95.00 to NT$98.00 based on our new Asia refining margin and
petrochemical spread estimates. FPCC is still trading at a premium to regional refining peers despite its weaker earnings growth outlook for 2011E.
In addition, we believe FPCC's refining utilisation rate will remain low at an average of 80% for 2011 due to the impact on capacity from the fire
incident in July 2010. For its olefin production, ethylene-naphtha spreads are still low at around US$380/tonne in Q111, which is around 30% below
the average in Q110. We think spreads should remain weak in H111 but could recover more meaningfully in H211.
Source: UBS estimates
Price target derivation
Formosa Plastics: We base our price target of NT$115.00 on a sum-of-the-parts
NAV estimate.
Nan Ya Plastics: We base our price target of NT$98.00 on our sum-of-the-parts
NAV estimate.
Formosa Chemicals & Fibre: We base our price target on a sum-of-the-parts
NAV estimate.
Far Eastern New Century: Our price target is derived from a sum-of-the-parts
analysis.
Formosa Petrochemical Corporation: We derive our price target from a DCFbased
methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool. Our price target assumes WACC of 5.6%.
S-Oil: We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a
WACC of 7.9%.
GS Holdings: We base our price target on our sum-of-the-parts NAV estimates.
We use DCF to derive the value of GS Caltex, assuming 10.7% WACC and 2%
terminal growth.
SK Innovation: We derive our Won245,000 price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool. We assume a WACC of 9.3%.
Thai Oil: We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers with UBS’s VCAM tool. We
maintain our WACC assumption at 8%.
PTT Aromatics and Refining: We derive our price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers with UBS’s
VCAM tool. We maintain our WACC assumption at 7.1%.
Essar Oil: We value the company using a sum-of-the-parts methodology
(refinery + retail + upstream). We value the core refining operation at
Rs140/share, retail at Rs17/share, and upstream assets at Rs18/share.
Reliance Industries: We use a sum-of-the-parts valuation methodology.
PETRONAS Chemicals Group Berhad: We derive our price target from a
DCF-based methodology and explicitly forecast long-term valuation drivers
using UBS’s VCAM tool (WACC of 10.7%).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia Refining & Petrochemical
Opportunity re-emerging
Attractive valuations with improving fundamentals
We reiterate our positive view on the Asia refining and petrochemical sector. After
the recent share price corrections, we think refining and petrochemical stocks are
trading at more attractive valuations (13.0x/11.1x 2011E/2012E PE), while refining
margins and petrochemical spreads have further improved YTD and now exceed
our estimates.
Raise refining margin forecasts
Refining margins in Asia have been stronger than we expected due to strength on
the demand side and unexpected supply disruptions. The average complex refining
margin YTD is up 26% QoQ and 35% YoY. We have raised our 2011/12/13
refining margin forecasts from US$4.35/4.40/4.45/bbl to US$5.50/5.75/6.00/bbl to
reflect stronger-than-expected product demand.
Raise spread forecasts for polyester chain
Cotton prices have risen a further 30% YTD, and spreads of polyester feedstocks
(PX, PTA and MEG) have exceeded our estimates and significantly outperformed
most other petrochemicals over the past two quarters. PX and MEG spreads have
more than doubled from the Q310 level. We have revised our spread forecasts for
PX/PTA and MEG upwards.
Most preferred: Thai Oil, GSH, Essar Oil, FCFC, NYP, PCG
Among Asian refining stocks our preferred picks are Thai Oil in Thailand, GS
Holdings (GSH) in Korea, and Essar Oil in India. Among petrochemical stocks,
Formosa Chemicals & Fibre (FCFC) and Nan Ya Plastics (NYP) in Taiwan and
Petronas Chemicals Group (PCG) in Malaysia are our preferred picks. We remain
Neutral on Formosa Petrochemical (FPCC), Reliance Industries, and PTT
Aromatics (PTTAR).
Executive Summary
Refining: margins beat our expectations
In 2010, the average complex refining margin increased 23% to US$4.5/bbl,
which is 8% above our previous estimate of US$4.15/bbl. Refining margins
have expanded further in Q111, with the YTD average complex refining margin
reaching US$6.9/bbl, up 26% QoQ and 35% YoY.
We have revised our 2011/12/13 refining margin forecasts upward from
US$4.35/4.40/4.45bbl to US$5.50/5.75/6.00bbl to reflect stronger-than-expected
product demand. We believe refining margins in Asia should continue to recover
in 2011-12 given the limited new capacity coming on stream. We expect
demand growth to outpace supply growth in 2011-12 and utilisation rates to
gradually recover from 87.6% in 2010 to 88.9% in 2012.
Petrochemicals: polyester chain outperforming
As pointed out in our report Asia Refining & Petrochemical Sector:
Fundamental improvements ahead, published on 24 November 2010, the
polyester chain is one of our three major investment themes for 2011, given our
view that strong cotton prices should continue to drive up prices of polyester
filaments as well as their upstream feedstocks MEG, PTA, and PX. Cotton
prices have increased a further 30% YTD, and spreads of polyester feedstocks
have significantly outperformed most other petrochemicals over the past two
quarters.
We have revised upward our petrochemical spread assumptions, mainly for
polyester feedstocks. We now expect the average MEG-ethylene spread to reach
US$350/tonne in 2011, up from our previous estimate of US$190/tonne. For the
PX-naphtha spread we raise our estimate from US$370/tonne to US$550/tonne
for 2011 and for the PTA-naphtha spread, we raise our 2011 estimate from
US$503/tonne to US$605/tonne.
Most and least preferred stocks in Asia
We reiterate our positive view on the Asia refining and petrochemical sector.
For refining stocks in the region, we prefer GS Holdings in Korea, Thai Oil in
Thailand, and Essar Oil in India. For petrochemical stocks, we prefer FCFC and
NYP in Taiwan, and PCG in Malaysia.
GS Holdings is our top pick in the Korea oil and chemical space. The stock
is trading at the lowest valuations among refining companies in Asia but has
ROE in line with the industry average. In addition to strong refining margins
and PX spreads, we think the potential listing of GS Retail could be another
positive catalyst for GS Holdings in Q311.
Thai Oil (TOP) is our top pick in the Thailand energy sector given its strong
forecast earnings growth, solid FCF yield, and LPG pricing reform in
Thailand. We think its BTX capacity expansion in 2012 should drive up
medium-term earnings growth.
Essar Oil is our top pick in the Indian oil and gas space. We believe the
stock is trading at attractive valuations at only 7.7x FY13E PE, and we see
its timely refinery upgrade to higher complexity and throughput—likely by
mid-2011—as a key trigger for the share price.
FCFC is our top-pick in the Taiwan petrochemical space. The stock is
trading at the lowest valuations among petrochemical companies in Asia but
with above average ROE and the highest 2011E cash dividend yield. The
company is a leading PX/PTA producer in Asia and we expect it to benefit
from the strong polyester demand.
PCG is our top pick in the Malaysia petrochemical space. We believe PCG
is well positioned in Southeast Asia to profit from rising petrochemical
prices and a stable feedstock cost. In addition to its exposure to PX and MEG,
strong urea and methanol prices (up 52% and 44%, respectively, since July
2010) should be key earnings drivers in the near term.
Table 1: Highlights of petrochemical stocks under our coverage
Company Rating Key highlights
FCFC Buy We maintain our Buy rating on FCFC and raise our price target from NT$115.00 to NT$125.00 based on our new petrochemical spread estimates. We
believe FCFC is best positioned to profit from the rising polyester demand in Asia given its large-scale and integrated PX/PTA production capacity. In
addition, FCFC is trading at an attractive valuation of 10.8x 2011E PE. We forecast 18% bottom line growth this year and c7% cash dividend yield.
Given its strong cash flow, FCFC generates the highest cash dividend yield among petrochemical companies in Asia, while it continues to expand
capacity overseas. It plans to double its PTA, ABS, and PS capacity in China by 2013, which we believe will further support the company’s mediumterm
growth outlook.
FPC Buy We reiterate our Buy rating on Formosa Plastics (FPC) and raise our price target from NT$110.00 to NT$115.00 as we factor in forecast higher cash
dividend income from NYP and FCFC as well as stronger equity investment income from FPCC based on our new regional refining and petrochemical
spread assumptions. We expect FPC to deliver another year of strong core earnings in 2011. Management expects its carbon fibre business to turn
profitable in H111 on rising ASP and higher utilisation rates. For its specialty chemicals, the AN-propylene spread has expanded a further 10% so far in
Q111. In addition, PP-propylene spreads have more than doubled from Q310 to Q111. We estimate a 6% cash dividend yield in 2011 given its strong
earnings recovery in 2010, with a high cash payout ratio of 80%. Meanwhile, FPC is still investing overseas (new gas-based crackers in the US,
downstream PVC, EVA, SAP, AA/AE plants in China, and a steel mill in Vietnam) for its long-term growth.
NYP Buy We maintain our Buy rating on NYP and raise our price target from NT$84.00 to NT$98.00 based on our new regional petrochemical spread forecasts.
We believe NYP is well positioned in Asia to profit from recovering MEG spreads and stronger polyester demand given its leading market position for
both products in terms of operational scale. We expect another year of strong earnings in 2011 driven by expanding MEG spreads and higher
utilisation rates on no major maintenance shutdown this year. In addition to forecast core earnings improvement, stronger equity income from FPCC
and Nanya PCB should support NYP earnings in 2011.
PCG Buy We reiterate our Buy rating on PCG and raise our price target from RM7.30 to RM7.60 based on our new regional petrochemical spread forecasts. We
believe PCG is well positioned in Southeast Asia to profit from rising petrochemical prices and a stable feedstock cost. PCG has 500K tpa PX and
380K tpa EG capacity in Malaysia. We estimate that these two products together will account for 11% of its total shipments in FY11. Given the strong
PX/MEG prices since H210 (MEG price up 79% and PX price up 95% since July 2010), we expect improving earnings momentum in the near term.
Urea and methanol are more of an earnings driver for PCG as we estimate these two products together will account for a 42% of its total shipments in
FY11, and the prices of urea and methanol have increased 52% and 44%, respectively, since July 2010.
FENC Buy We maintain our Buy rating on Far Eastern New Century (FENC) and raise our price target from NT$54.00 to NT$56.00 based on our new regional
petrochemical spread forecasts. FENC is a leading polyester producer in Asia. Its PTA capacities not only fully supply its own polyester production but
50% is sold to outsiders. We believe FENC is well positioned to benefit from the improving spreads of polyester-PTA-MEG and PTA-PX. FENC will add
100k of capacity for recycle products, thus increasing polyester capacity in Taiwan 10% in 2011. FENC sold 908 ping of land to Far Eastern Hospital at
NT$477,000/ping, which will contribute NT$331m in disposal gains in Q111. Management plans to sell another 1,000 ping of land in 2011, which we
estimate would bring 2% upside to our earning estimates. The remaining development benefits of California Dreaming (NT$1.6bn), will be booked in
full in 2011.
Source: UBS estimates
Table 2: Highlights of refining stocks under our coverage
Company Rating Key highlights
TOP Buy We reiterate our Buy rating on TOP and raise our price target from Bt88.00 to Bt92.00 following our higher regional refining margin and
petrochemical spread forecasts. We believe TOP is well positioned to deliver strong earnings growth in 2011, driven by continued recovery in middle
distillate spreads; stronger PX-naphtha spread and a narrower net loss on LPG products post Thailand's LPG reform in January 2011. Longer term,
TOP's BTX capacity expansion should further support its earnings growth in 2012E. We estimate 15% FCF yield in 2011 and believe a higher
dividend could be the next positive catalyst for the share price.
GSH Buy We maintain our Buy rating on GSH and raise our price target from Won80,000 to Won95,000 based on our new Asia refining margin and
petrochemical spread assumptions. We expect GSH to deliver another year of strong earnings in 2011, given improving refining margins and
petrochemical spreads. Another key driver of earnings in 2011 is likely to be the newly completed refining upgrade unit, which began operations in
October 2010. GS Caltex should have another upgrade unit start running in 2013, contributing further to its refining earnings. We believe the key
catalysts for GSH’s share price include: 1) strong earnings momentum in the near term, given the improving refining margin in winter and PX spread
expansion on stronger demand, plus contribution from the new upgrade unit in Q410; 2) positive developments on the GS Retail listing; and 3)
improving cash dividends.
SKI Buy We reiterate our Buy rating on SK Innovation (SKI) and raise our price target from Won220,000 to Won245,000 based on our new regional refining
margin and petrochemical spread estimates. We believe SKI is trading at attractive valuations given its solid forecast earnings growth in 2011. We
are positive on SKI’s near-term earnings momentum given: 1) lube base oil margins should recover starting from Q111; 2) refining margins have
improved further in Q111; 3) PX-naphtha spreads are even higher in Q111; and 4) olefin/polymer capacity returning to normal operations after the
major shutdowns in Q410. In addition, the potential disposal gains from selling its E&P assets could be a share price catalyst for SKI in the next three
to six months.
S-Oil Buy We maintain our Buy rating on S-Oil and raise our price target from Won110,000 to Won135,000 based on our new regional refining margin and
petrochemical spread forecasts. We believe S-Oil is well positioned in Asia to deliver strong earnings growth in 2011 on recovering refining margins
and petrochemical spreads given its complex refining capacities and new petrochemical capacities coming on stream in Q211. S-Oil will add a new
900K tpa PX plant in Q211, and its total PX capacity should reach 1.6mn tpa (up 128%) in Q211. We expect the capex cycle to come down
significantly for S-Oil after the expansion over the past three years, which should also lead to stronger cash yield in 2011.
Essar Oil Buy We reiterate our Buy rating on Essar Oil, which is our top pick in the Indian oil and gas space. We believe the stock is trading at attractive valuations
at only 7.7x FY13E PE. We believe its timely refinery upgrade to higher complexity and throughput will be a key trigger for the share price. Essar Oil
will upgrade its refinery capacity to 375,000 bpd by mid-2011, which will translate to increase on Nelson complexity from 6.1 to 11.8. Our checks and
interaction with management lead us to believe the timeline will be met, as will the commercial production of coal bed methane at Raniganj. We base
our price target of Rs175.00 on a sum-of-the-parts valuation.
Reliance Neutral We maintain our Neutral rating on Reliance with a price target of Rs1,050. Reliance’s earnings are led by the upstream, petrochemical and refining
segments, which contributed 24%, 38% and 38% to its operating profit in Q3 FY11, respectively. We expect modest improvements in refining and
petrochemical margins going forward but expect flat gas volumes till FY13. KGD6 volumes declined from a peak of 57mmscmd to the current levels
of 43-45. RIL has given no volume guidance but the current production drop suggests that a sharp ramp up to 80mmscmd in 2012 is unlikely. We are
therefore cautious on peak production from the KG D6 block. We expect gas production at 60mmscmd in FY13 but consensus is still at 80, so
earnings forecast downgrades are likely in our view. Despite our positive view on refining and petrochemical operations, we expect the upstream
segment to drag earnings down.
PTTAR Neutral We reiterate our Neutral rating on PTTAR as the stock is fully valued in our view. We raise our price target from Bt39.50 to Bt42.00 following our
higher regional refining margin and petrochemical spread forecasts. The stock is trading at 16.5x 2011E PE, which is at a premium to its peers in the
region. We believe the share price has already reflected the company’s high exposure to strong PX price. In addition, we think PTTAR's volume
growth outlook is weaker than peers, and its relatively high net gearing ratio implies lower long-term growth opportunities than peers. However, a
potential merger between PTTAR and another PTT group company could be a positive for PTTAR in the near term.
FPCC Neutral We maintain our Neutral rating on FPCC and raise our price target from NT$95.00 to NT$98.00 based on our new Asia refining margin and
petrochemical spread estimates. FPCC is still trading at a premium to regional refining peers despite its weaker earnings growth outlook for 2011E.
In addition, we believe FPCC's refining utilisation rate will remain low at an average of 80% for 2011 due to the impact on capacity from the fire
incident in July 2010. For its olefin production, ethylene-naphtha spreads are still low at around US$380/tonne in Q111, which is around 30% below
the average in Q110. We think spreads should remain weak in H111 but could recover more meaningfully in H211.
Source: UBS estimates
Price target derivation
Formosa Plastics: We base our price target of NT$115.00 on a sum-of-the-parts
NAV estimate.
Nan Ya Plastics: We base our price target of NT$98.00 on our sum-of-the-parts
NAV estimate.
Formosa Chemicals & Fibre: We base our price target on a sum-of-the-parts
NAV estimate.
Far Eastern New Century: Our price target is derived from a sum-of-the-parts
analysis.
Formosa Petrochemical Corporation: We derive our price target from a DCFbased
methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool. Our price target assumes WACC of 5.6%.
S-Oil: We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a
WACC of 7.9%.
GS Holdings: We base our price target on our sum-of-the-parts NAV estimates.
We use DCF to derive the value of GS Caltex, assuming 10.7% WACC and 2%
terminal growth.
SK Innovation: We derive our Won245,000 price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers using UBS’s
VCAM tool. We assume a WACC of 9.3%.
Thai Oil: We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers with UBS’s VCAM tool. We
maintain our WACC assumption at 8%.
PTT Aromatics and Refining: We derive our price target from a DCF-based
methodology and explicitly forecast long-term valuation drivers with UBS’s
VCAM tool. We maintain our WACC assumption at 7.1%.
Essar Oil: We value the company using a sum-of-the-parts methodology
(refinery + retail + upstream). We value the core refining operation at
Rs140/share, retail at Rs17/share, and upstream assets at Rs18/share.
Reliance Industries: We use a sum-of-the-parts valuation methodology.
PETRONAS Chemicals Group Berhad: We derive our price target from a
DCF-based methodology and explicitly forecast long-term valuation drivers
using UBS’s VCAM tool (WACC of 10.7%).
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