TPIPL is expected to post 4Q08 normalised earnings of Bt85m, down 45% YoY and 85% QoQ. Its projected poor results are due to weak demand for cement, inventory de-stocking and inventory losses. With the political climate improving and inventory re-stocking, we expect an earnings rebound in 1Q09. Coupled with its cheap valuation, a Buy call is maintained although near-term upside is likely to be limited by the overhang from three court cases.
The economic downturn resulted in cement demand in October and November 2008 falling by 19% YoY. Export demand and prices also softened while the company’s LDPE spread narrowed, especially in November, as prices plunged. Despite baht weakness, TPIPL’s interest expenses should be flat QoQ due to debt repayment of Bt450m during the quarter.
As TPIPL is unable to secure a new loan to refinance its restructured debt which fell due at end-2008, it is currently negotiating with creditors to seek easier terms and conditions. As its loan remains performing, management believes negotiations will be finalised soon with some terms being relaxed. If the negotiation prolongs, there is a risk that TPIPL’s debt will be classified as an NPL. This would force banks to set aside provisions, which is not a scenario creditors would like to see.
2008-10 forecasts are maintained so target price, based on the SOTP method, is unchanged at Bt6.10. Key risks are tougher price competition in the local cement market, the cyclical nature of LDPE and coal prices and baht depreciation. Also there are potential losses from three court cases, including a Bt6.9bn fine in a share price manipulation case, a Bt2.1bn loss from a lawsuit regarding supply of machinery and a dispute over a debt repurchase program.