Formosa Petrochemical Corp. (6505.TW):
First Take: Significant loss in 4Q; low cash
yield to trigger de-rating
Company Name: Formosa Petrochemical Corp. Ticker: 6505.TWPrice:
59.6 52-Week Price Range (NT$): 99-56
Year Net EPS EPS . Dividend
To Income Diluted Growth P/E Yield
December NT$ NT$ Dil% X %
2006 44,476.35 4.81 -24.61 12.39 4.85
2007 69,610.79 7.53 56.55 7.92 11.24
2008E 21,621.95 2.34 -68.92 25.47 1.96
2009E 27,551.16 2.98 27.35 20.00 2.50
2010E 27,807.35 3.01 1.01 19.80 2.52
Price Performance (absolute): 1m: +0% 3m: -11% 12m: -37%
Price Performance (relative): 1m: -6% 3m: -17% 12m: +7%
Stock Rating: S
News
FPCC reported a NT$30.4bn net loss in 4Q08, larger than our estimate of a NT$23.9bn
net loss and Reuters consensus of a NT$316mn net loss, along with 4Q08 GM and OM
falling to –21.5% and –23.2% from 5.6% and 4.8% in 3Q08 due to sharp declines in oil
and chemical product prices. The board also proposed a cash payout ratio of 72% in
2009E, higher than our estimate of 50%. Overall, we think the low cash yield (now only
1.9%) and weak company fundamentals should lead to further valuation de-rating.
Maintain Sell rating.
Analysis
Sharp decline in product price to lead to significant margin erosion in refining and olefin
divisions: While oil product prices have reflected the 51% qoq decline in the WTI oil
price (to US$58/bbl in 4Q08), we estimate the company’s crude oil cost was around
US$72/bbl in 4Q08 due to a lagging effect, triggering OM for the refining division to
decline from 4.0% in 3Q08 to –18.4% in 4Q08. We also note that OM for the olefin
division fell from 4.0% in 3Q08 to -41.9% in 4Q08 due to significant contract price cuts
for downstream customers. Low cash yield to disappoint the market: With the 72%
proposed cash payout ratio, we think the current cash yield of just 1.9% will lead to
further share price de-rating given the market has always considered FPCC to be a high
cash yield stock. Continued price and margin pressure in 2009E: With more new capacity
to come on line from the Middle East as well as weak demand due to sluggish macro
conditions, we expect fundamentals to remain weak in 2009E.
Implications
We suggest investors sell into recent strength (Formosa Group member Chang Gung
Memorial Hospital has been buying FPCC shares) given the weak fundamentals. Our
estimates and TP are under review.
The Goldman Sachs Group Inc. does and seeks to do business with companies covered in
its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment
decision.
March 13, 2009 Analyst Comment
2 Goldman Sachs Global Investment Research