TPI Polene (TPIPL)

TPI Polene Plc (TPIPL)

Share price rises 23% in 1 month but fundamentals still not change
TPIPL’s share price has sprung vigorously by 23% in only 1 month to B14.1
while fundamentals haven’t changed significantly. We believe that this could
be a result of speculation in laggard stocks, especially ones with PBV lower
than 1x, and positive trend during preparation before the flood. Nevertheless,
the tendency of 3Q12 earnings result might not be bright as projected due to
the spread between LDPE and ethylene in 3Q12 has declined to US$155/ton
especially in September that the spread is low at only US$55/ton compared
with US$218/ton in 2Q12, as the earnings result of petrochemical business
contributes 30-50% to the total profit. For the cement business, although the
selling price of cement has increased by B50/ton in 3Q12, it is only a rise to
compensate the electricity cost that has ascended along FT. Accordingly,
we’re convinced that TPIPL’s profit base is likely to stand at only B300-400m
which is lower than the norm profit in 2010-2011 at B500-700m/quarter. In
terms of the company’s book value that is high at B30/share, it will decrease
to B17/share if the additional asset valuation is excluded (in the same
method used with SCC and SCCC.

Change of fundamentals to witness clearly since 2015 onward

TPIPL’s march toward growth expansion has recurred after the concerns
toward the case with fine of B6.9bn have vanished. The company currently
has 3 big projects as follows: 1) a cement factory of the 4th production line
with investment budget of B10bn, 2) a small power plant which uses waste
as a raw material and a power plant that receives waste heat from the
cement factory of the 4th production line (with investment budget of B4bn in
total) and 3) a fiber-cement factory with the investment budget of B2.5bn.
All of the mentioned projects’ loan agreement will be made conclusive within
this year and the construction will begin in 2013 which will take 2 years to
complete, so TPIPL’s fundamentals still haven’t changed substantially until
2015. The project that might bring about highest profit is the power plant
that uses waste as a raw material with the capacity of 90 MW because it will
receive the adder at B3/unit which will urge TPIPL’s pay back period to take
not over 5 years.

Price exceeds fair value and dividend yield unappealing.
Downgrade to “SELL”

Although 2013 profit is projected to recover to B2,022m, the operating profit
in 2012 is projected to be low at only B857m (the lowest in 10 years). The
current share price has stood at B14.1, reflecting PER that is based on 2013
profit at 14.08x which is considered high for TPIPL with its fluctuation in
earnings result and dividend yield at only 1%. We derive the fair value, using
adjusted book value (the excess of asset price valuation is excluded) and the
discount conservatively assigned at 30%, at B12.19 which is equal to 2013
PER at 12x. Accordingly, we downgrade our recommendation from “HOLD” to
“SELL”.