Huge 4Q02 loss from extra items and delayed spending by Highway Department

Tipco Asphalt (TASCO) reported disappointing 4Q02 results with a huge net loss of Bt216mn (EPS – negative Bt1.9/share) compared with earnings of Bt84.5mn in the previous year and a net loss of Bt43mn in the previous quarter.

This was due mainly to extraordinary losses totaling Bt172mn. If we exclude these losses, TASCO would have posted a net loss of only Bt44mn. The poor operating performance in 4Q02 was the result of 1) project delays by the newly-created Rural Highway Department; 2) delays to road construction and maintenance projects following changes to the Department of Highways (DoH) bidding procedures; 3) the prolonged rainy season, which lasted well into November; and, 4) a rise in global oil prices.

For the full year 2002, TASCO posted a net loss of Bt91mn (EPS – negative Bt0.76/share), compared with net profit of Bt116.5mn in 2001. If excluding the net loss from the extraordinary items of Bt164mn, TASCO would have posted a net profit of Bt73mn.

With the spending delays by the new Rural Highway Department and negative effect of rising oil prices, we assume that TASCO will book another loss in 1Q03. We maintain a short-term recommendation on TASCO shares of "HOLD." However, longer-term investors would benefit from picking up the stock on weakness and hold for the eventual recovery. TASCO's current share price is not expensive, trading on a 2003 PER only 8.42x, EV/EBITDA of 7.33x, P/BV of 0.91x and a 42.3% discount to our revised fair value estimate of Bt30.

TASCO's income statement (Mn Bt)

Note: COGs does not include Depreciation and Amortization

• TASCO’s 4Q02 sales slightly improved to Bt1,066mn, up 9.6% qoq and 5.5% yoy. But this was due to higher prices since total sales volume declined to 106,400 tonnes. Exports, particularly to China, remained strong, increasing 10% qoq and 285% yoy to 48,500 tonnes. This was enough to offset the slump in the domestic market with sales volume falling 16% qoq and 46% yoy to only 53,100 tonnes. Domestic sales in the quarter were hurt by: 1) delays in spending by the newly-created Rural Highway Department; 2) delays in road construction and maintenance projects by the Department of Highways (DoH) due to changes to its bidding procedures; and, 3) the prolonged rainy season which lasted until November.

Delays in spending by the Rural Highway Department will continue to effect TASCO's sales in 1Q03. However, the management sees some signs of improvement with new projects being opened for bidding. The company believes that actual construction work can soon begin shortly after the winning bidder is selected since the budget has already been distributed to the various government departments and agencies responsible for road work. The management believes that this will translate into higher domestic asphalt sales from the end of March onwards. Our earnings forecast for TASCO are based on a 13% expansion in sales this year to 540,000 tonnes.

TASCO'S volume Sales & Projection (Tons)

Source : TASCO

• TASCO's gross margins in 4Q02 narrowed to only 12.7%, down from 15.1% in 3Q02 and 26.7% in 4Q01. This was due to the lower sales volume of higher margin Asphalt Emulsion and higher sales volume of low-margin Asphalt Cement exports to China. The Asphalt Emulsion sales achieve gross margins of around 40-45% while Asphalt Cement exports tend to make gross margins of around 10-15%. Higher costs from rising oil prices were another factor in TASCO's narrowing margins.

• TASCO's 4Q02 interest expenses fell 17% qoq and 58.8% yoy to only Bt36.8mn, as refinancing reduced the company’s borrowing rate to MLR minus 1.5% from MLR minus 0.25%.

• In 4Q02 TASCO booked an extraordinary loss of Bt172mn due to 1) Bt142mn loss for vessel impairment, 2) Bt20mn loss on inventories damaged during transportation and 3) Bt30mn in extra income tax, value added tax and penalties. The company also booked gains on debt forgiveness of Bt30mn.

TASCO's income statement (Bt mn)

Note: COGs does not include Depreciation and Amortization