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Phillip Stock Market For Beginners Advice Recommends Buy TOP

Thai Oil – TOP

Target price : Bt36
Recommendation : BUY
Closing Price (20 April 09) : Bt31.75

TOP poised to return to profit in 1Q09
- Our forecast suggests that Thailand's top refiner TOP will swing back to a profit in 1Q09.
- We revise our net profit forecast for 2009 upward by 12.8%.

investing in the stock market for beginners
- We raise our recommendation for TOP to 'Trading BUY' from 'SELL' and lift our price target to Bt36/share.

TOP poised to return to profit in 1Q09
We expect Thailand's top refiner TOP to deliver a net profit of Bt2,371m, or Bt1.16 a share in 1Q09, down 38.8% from the same quarter in 2008 but reversing a massive loss of Bt8,394m in the prior quarter. On a YoY basis, the expected earnings decline reflects the absence of oil stock gains. TOP booked an oil inventory gain of US$2.4/barrel in 1Q08. On a QoQ basis, earnings are expected to turn into the black, reflecting a massive oil stock loss of US$22.7/barrel in the prior quarter. Our estimate assumes that TOP will achieve GRM (excluding oil stock gain/loss) of US$4/barrel in 1Q09, off 10.9% YoY and 49.3% QoQ. TOP's refining margins are forecast to contract both YoY and QoQ, bucking the improving trend in Singapore complex margins as gasoline spreads appear to have risen sharply 162% QoQ to US$9.6/barrel, but TOP seems to get little benefit as its maximum gasoline yield is only 25% below 31% for Singapore complex margins. TOP has high middle distillate yield (gasoil, jet) of 60-65% but spreads appear to have dipped below US$10/barrel against US$23/barrel in the same year-ago quarter and US$18-23/barrel in the prior quarter. The performance of its petrochemicals subsidiary Thai Paraxylene (TPX) is also expected to improve both YoY and QoQ as utilization rate would likely climb to 70% from 63% in the prior quarter. The paraxylene plant has operated at 100% capacity, while TPX has lowered its capacity utilization for benzene and toluene where prices remain weak to the lowest possible levels at 50%. Capacity utilization at oil lubricant subsidiary Thai Tube Base (TLB) would climb back up to 60% from 56% in the prior quarter. At TPX, PX-ULG spreads are forecast to widen 49% YoY and 72.5% QoQ to US$383/ton, but 500SN-HSFO spreads at TLB are anticipated to drop 8.3% YoY and 51.3% QoQ to US$398/ton.

2009 net profit view raised by 12.8%
Oil prices have already bottomed out, but we however believe oil is unlikely to run up as high as last year as economic crunch would put a damper on oil demand. It also seems to us that the current oil price levels of US$40-US$50/barrel, down 46.6%-57.3% from a 2008 average of US$96.3/barrel would bode well for TOP as costs should drop in terms of yield losses and narrowing losses on sale of price controlled LPG. Last year, TOP recorded a loss of US$2.8/barrel from sale of LPG. Losses are expected to sharply narrow to US$0.4/barrel in 1Q09. The current slowing economic environment would cut into shipping demand and oil transportation costs would thereby slip to US$0.5/barrel from a year-ago level of US$1.5-US$2/barrel. Sliding costs would help lift refining margins. On balance, we raise our refining margin assumptions for 2009 to US$4.50/barrel from a previous estimate of US$4/barrel. The revision also prompts us to revise our 2009 net profit forecast upward by 12.8% to Bt9,145m, or Bt4.48 a share from a previous estimate of Bt8,110m.

Upgrade to 'Trading BUY' with price target lifted to Bt36/share
Oil prices are showing signs of stabilizing and are poised to head back up. The survey by Bloomberg and the forecast by Bernstein suggest that average oil prices based on West Texas Intermediate (WTI) crude will increase sequentially every quarter from US$41/barrel in 1Q09 to an estimated US$58/barrel in 4Q09. In our opinion, the overall refining margin trend remains largely unchanged. We expect refining margins to flatten in 2H09, especially during the seasonally low third quarter. In light of the upward trend in oil prices, TOP would however no longer see oil inventory losses and cheaper oil prices would mean lower costs. On this basis, we believe the risk of earnings volatility is quiet limited. We also lift our 2009 price target for TOP to Bt36/share to reflect an increase in target P/E to 8x from 6x. The new target offers a 13.4% upside from the latest closing price of Bt31.75/share. At it stands, we upgrade our recommendation for TOP to 'Trading BUY' from 'SELL.'

By Phillip Securities (Thailand) Plc. on Apr 21, 2009

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