Maybank Kim Eng has upgraded the recommendation of IRPC Public Company Limited (IRPC) from “Hold” to “BUY” with a target price at ฿2.80/share as the direction of GRM is firmly positive while chemicals should hold up.
Maybank upgraded IRPC to a BUY from HOLD as the valuation is too attractive to ignore (P/B of 0.5x, -2.5 SD 10-yr mean) but left its target price unchanged at THB2.8. IRPCs stock price is once again testing the March lows. IRPC will post a negative NPAT for the year due to stock loss of THB7.8b in 1H20 and poor refining GRM, nevertheless Maybank suggested investors look forward to FY21. Despite some uncertainty on pace of GRM recovery, direction is firmly positive while chemicals should hold up. Maybank did not see any near-term catalyst, but investors who are willing to hold for longer than 3-6 months should be adequately rewarded.
Maybank expected 2020E GIM to come in at USD8.5/bbl. IRPCs cash/breakeven cost is USD7.5/10.5 bbl implying it is cash flow positive. Maybank lowered 2020E core NPAT to THB-1.4b from THB-680m as GRM weakness persists. Although Olefin spreads have been supportive with PP spreads averaging USD556/t in 1H20, refining operations have been a drag and will continue to do so in 2H20.
In 3Q20, Maybank estimated GIM to remain flat QoQ at USD8.5/bbl with chemicals offsetting softer refining GRM (USD1/bbl vs USD2.6/bbl in 2Q20). The weakness was due to higher crude premium of USD2/bbl vs USD-0.8/bbl in 2Q20. Given IRPCs heavy exposure to Arab Light (50%), potential catalysts are 1.) Aramco may deepen discounts for Arab Light in 4Q20 to spur demand as they did in 2Q20 2.) discounts on Arab Light grade will be deeper than Murban (TOP and SPRC have high exposure) as UAE (ADNOC) is under pressure to cut production following poor compliance in August which may tighten supply. QTD, PP and ABS spreads remain healthy at USD577/t and USD1050/t and should continue.
The security company expected IRPC’s profitability to improve in FY21, however uncertainty remains on pace of GRM recovery. China will continue to add capacity additions in PP and ABS. The target price, linked to 0.8x P/B (-1.5SD below 10-yr avg) reflects this underlying dynamic. Market expects diesel to start normalizing in 2Q21. For petrochemicals, IHS Markit estimates that PP capacity additions in 2020/21 were 8.7MT/4.2MT which is sizeable. Most of this is coming from China given their push for self-dependence.
In its view, PP spreads have likely peaked at USD600/t this year and will be range bound between USD500-550/t. ABS, which was one of the bright spots for IRPC will also see capacity additions of 750kta in 2021.
IRPC has cut its GHG emissions by 12.4% with a target of 20% by 2030. Sustainability remains an important area of focus for the company given the changing landscape, but IRPC is in a tight spot as it needs to balance this with lagging profitability. Energy intensity remains high while green portfolio is on the lighter side but set to improve following completion of Ultra Clean Fuel project in 2023.