Thai Oil

Bualuang Securities August 31, 2012 11:41 am

Thai Oil Plc (TOP)

What's new? TOP issued a press release yesterday in which it said its board had approved the amalgamation of IPT (TOP has a 54.8percent stake) and PTTUT (60% held by PTTGC and 40% by PTT) to set up a new company. With the merger, TOP's shareholding in Merged Co will decline to 27.12%, while the stakes of PTT and PTTGC will fall to 37.31% and 30.31%, respectively, with J-Power group making up the balance.

Background: IPT owns and operates a 700MW gas-fired IPP unit. PTTUT manages a 657MWequivalent gas-fired co-generation unit in Rayong province. That said, Merged Co will have a total generating capacity of 1,357MWequivalent (comprising power capacity of 1,038MW and steam capacity of 1,340ton/hour).

Post-merger profit contribution almost unchanged ? While TOP's equity capacity in the power business will decline by 16MW to 433MW, the post-merger profit contribution from the power business will be materially unchanged and will the profit contribution to TOP. A more profitable co-generation business (mainly from steam sales) will offset the effect of diluted equity capacity, in our view. In any case. IPT's profit contribution to TOP comprises only 3% of its earnings.

?but improve long-term profit at the marginal expense of PTT and PTTGC ? Given that IPT started operating in August 2000, its earnings profile is on a downtrend as stipulated by its long-term PPA with EGAT. As such, the merger will mitigate TOP's declining power earnings trend. The impact on PTT and PTTGC will be negligible?power earnings comprise only 0.2% and 1.2% of their respective bottom-lines.

?and mean greater scope for capacity growth: In our view, the merger is in line with PTT's strategy of not just restructuring the group's power portfolio but creating a power flagship. Merged Co will play a key role in the conglomerate's future expansion, both in Thailand and abroad, including participating in upcoming new IPP tenders. As such, we believe the group's power restructuring will create value for TOP's power business over the long term.

Action: We expected the merger and regard it as essentially neutral with regard to sentiment toward TOP. While the group restructuring will improve the earnings profile of its power business, the benefits will take some time to materialize and in any case comprise only a few percentage points of TOP's bottom-line.

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Source: http://www.nationmultimedia.com/business/Thai-Oil-30189487.html

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