1QFY16 net profit to grow 25% q‐q, supported by aromatics business and FX gains

　　We expect TOP’s 1QFY16 net profit to grow 25% q‐q to Bt4,672mn as: 1) aromatics business appearsto enjoy wider spread; 2) stock and NRV losses are likely to narrow down to roughly Bt383mn vsBt4,166mn in 4QFY15; and 3) TOP is expected to record FX gains of Bt678mn vs Bt318mn (TOPbenefits from a stronger baht from its USD‐denominated debt and its account receivable.) However,normalized profit, excluding stock losses and FX gains, would fall 42% q‐q to Bt4,377mn due to anarrower spread that seems to dampen profitability in its refinery and oil lubricant businesses, andlower utilization rate.

　　In aromatics business, utilization rate is expected to decline to 85% from 80% in the precedentquarter. Its P2F would climb to US$108/ton compared to US$93 in 4QFY15 after PX‐ULG95 spreadincreased by US$45 to US$333/ton on tight supply and BZ‐ULG95 spread rose by US$57 toUS$157/ton on stronger demand for derivative SM product.

　　As for refinery, its profitability seems to be dampened by narrower market GRM, lower utilizationrate, and oil and NVR stock losses. Market GRM is expected to decrease to US$6.0/barrel fromUS$8.5 in 4QFY15 as spread of gasoil‐Dubai narrowed by US$4.1 to US$9.6/barrel and Jet‐Dubaispread down US$2.3 to US$11.7/barrel after TOP ramped up its refining production to takeadvantages of wide BZ spread amid moderate cold weather. Note that production of both productsaccounts for 55% of TOP total output. Utilization rate is expected to decline to 107% from 110% in4QFY15.

　　In oil lubricant business, profit is likely to be pressured by a reduction in gross integrated margin,which we expect to fall to US$0.9/barrel from US$1.0 in 4QFY15 after Bitumen spread (BIT‐HSFO)narrowed to ‐US$8/ton from US$113 due to high stockpiles, and lower utilization rate, which appearsto decrease to 88% from 90%.

　　2QFY16 outlook dull on weaker GRM

　　We expect 2QFY16 earnings to decline on weaker GRM, though TOP would record profit contributionfrom its SPP power plant unit 1 (unit 2 will begin COD in April, which would generate quarterly profitof roughly Bt120mn), and there appears to be a lack of oil stock losses if the world’s crude oil pricethat has continued to climb will stay on course—Dubai crude price rose to US$40/barrel in quarter todate from US$35.4/barrel an average level in March.

　　Regarding weak GRM, Singapore GRM in 2QTD declined to US$5.1/barrel from US$7.7 in 1QFY16,due to a narrower gasoline‐DB spread. Yet the pace of GRM reduction for TOP seems to pale incomparison to Singapore GRM as TOP’s major refining products are diesel and Jet, of which spreadsseemingly declined at a slower pace than gasoline, and overhauls of a larger number of APACrefineries in May that would cause output to 2MBD vs 1.6MBD in April should help retain TOP’s GRMover the rest of 2QFY16.

　　FY16 target price of Bt70, ‘ACCUMULATE’ rating

　　Despite bright outlook in 1QFY16, the second quarter earnings seem to be pressured by weakGRM. Shares of TOP currently trades at a limited upside to our target price of Bt70. We thus cutour rating to ‘ACCUMULATE’ stance.