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500-1,000 million per year.Furthermore, BCP receives benefit from co-load, product swap, and others. * Operating expense composed of 2 parts: * Operating expense of Hydroskimming Units - variable expense is equal to $0.34/Barrel that will be inflated by inflation rate at 1.5% per year due to cost of PQI related to USD * Operating expense of Cracking Units - variable expense is equal to $0.09/Barrel that will be inflated by inflation rate at 1.5% per year due to cost of PQI related to USD. Fixed expense is equal to Baht 226 million per year that will be inflated by 3% per year due to cost related to Thai Baht. * Marketing expense - variable expense is equal to $0.132/Barrel that will be inflated by inflation rate at 3.0% per year due to cost related to Thai Baht. Fixed expense is equal to Baht 634 million per year that will be inflated by 3.0% per year due to cost related to Thai Baht. * Assumption of capital expenditure (CAPEX) of BCP can be divided into 4 categories * Maintenance CAPEX is equal to Baht 180 million per year * Capital lease is equal to Baht 551.7 million over 2004 to 2033 * Marketing expenditure is equal to Baht 195 million per year * Contingency expenditure is equal to Baht 30 million per year * Assumptions of working capital are following * Days in inventory of crude and ethanol is 40 days and days in inventory of finished oil is 19 days * Days in receivables is 19 days * Days in payables of crude and ethanol is 30 days and days in payables of finishes oil is 19 days * Other work capitals are fixed * The estimated investment of PQI or Hydrocracking is approximately $300 million composed of construction cost and other costs such as Financial Advisor and preparation cost at $288 million and interest expense between construction period at $12 million * The detail of depreciation period are following: * Existing refinery 30 years * New Cracking Units 25 years * Capital lease 30 years * Building 20 years * Equipment 5-20 years * Maintenance CAPEX 5-10 years * Loan repayment, cost of financing, and other reserves are in line with contracts and agreements. * Refinery improvement programs consisted of special discount from Patani crude, co-cracking program, co-loading, mogas Optimization, process alternative feedstock, and YELP followed the contracts and the business plan of BCP. * Foreign exchange rate of US dollar follows a principle of Purchasing Power Parity (PPP). The inflation comes from Consumer Price Indexes (CPI Index) of Thailand and United State that are equal to 30% and 1.5% respectively. * Growth Rate used in terminal value calculation is equal to 0.0% * Fully diluted shares before and after PQI are 867.14 and 1,531.64 Million shares respectively. Estimated Value by DCF method BCP plan to invest in Product Quality Improvement cost at $250-350 million. The capital financing comes from private placement of equity capital and convertible debenture about $150 million and Bank loan for the rest of project cost. Consequent to investing in PQI, BCP has appointed KEST as the Financial Advisor to evaluate the appropriate value of BCP in order to be a guideline of raising fund. The Financial Advisor has an opinion to use discount rate synchronized with a long-term capital structure or Debt to Equity Ratio at 1:1 to appraise the value of BCP. The ratio comes from debt to equity of the project in the long term and interview from management's opinion in long term. The best method to find discount rate is weighted average cost of capital (WACC) shown below: WACC = (D/V) * (1-tax) * Kd + (E/V) * Ke Definition: D/V = Debt to total capitalization E/V = Equity to total capitalization Tax = Corporate tax at 30% Kd = Cost of debt at 6.63% Ke = Cost of equity The Financial Advisor uses Capital Asset Pricing Model (CAPM) to calculate cost of equity or return to equity. The calculation is follow: Cost of Equity (Ke) Cost of Equity (Ke) = Rf + B (Rm - Rf) Definition: Risk Free Rate (Rf) = 5.00 % Beta (B) = 1.34 Equity Risk Premium (Rm - Rf) = 12.59% Therefore: Ke = 21.87 % In short, the equity risk premium is about 12.59% that comes from a difference between market return 17.59% (Source: Bloomberg as of August 23, 2005) and risk free rate 5% that come from yield of 10 year government bond as of August 23,2005). Beta over 3 years is at 1.34 that also comes from Bloomberg as of August 23, 2005. Thus, the WACC of BCP, come from the above figures, is in the following table. BCP Debt to total capitalization WACC (%) Long Term WACC 50.00 13.26 Actually, the PQI is the project that significantly contributes to value of BCP; therefore, the Financial Advisor evaluates value of BCP with above discount rate as of June 30, 2005 in two regards 1) Existing BCP and 2) BCP with PQI. Types Equity Value Fully Diluted Shares Share Price (Million Baht) (Million Shares) (Baht per Share) Existing BCP 12,089.31 867.14 13.94 BCP with PQI 25,737.57 1,531.64 16.80 *Equity Value equal to Enterprise Value deduct Net Debt of the Company From above table, the value of BCP common stock in case of existing BCP is 13.94 Baht per share and the value of BCP common stock in case of BCP with PQI at $300 million is 16.80 Baht per share. The range between existing BCP and BCP with PQI is about 2.86 Baht per share. In the calculation, the Financial Advisor uses fully diluted shares at 1531.64 million shares or increased from 867.14 million shares by 664.5 million shares based on board of directors' resolution. In conclusion, the investment in PQI will be worth for BCP's both existing and new shareholders in the long term. Sensitivity Analysis In addition to the based case, the Financial Advisor applies the sensitivity analysis to appraise the value of BCP's share as of June 30, 2005. Presently, demand of oil products is so close to supply of them that oil prices are vulnerable to all environments around the world. Due to scarcity of oil products, many oil producers have invested in refinery and excavation machines to expand supply of oil products. As a result of surge investments in the oil productions, cost of cracking unit planed to invest by BCP has been volatile. Consequently, the Financial Advisor runs sensitivity analysis based on investment cost and discount rate.The below table is the calculation of BCP's share based on investment cost and discount rate. WACC (%) Types Existing BCP With PQI:$250M With PQI:$300M With PQI:$350M Equity Baht/ Equity Baht/ Equity Baht/ Equity Baht/ Value Share Value Share Value Share Value Share (M.Share) (M.Share) (M.Share) (M.Share) 13.26-12,089.31 13.94 27,373.96 17.87 25,737.57 16.80 24,099.95 15.73 14.00-11,198.55 12.91 25,028.16 16.34 23,382.67 15.27 21,735.93 14.19 15.00-10,142.88 11.70 22,264.31 14.54 20,608.09 13.45 19,950.59 12.37 16.00- 9,220.88 10.63 19,867.83 12.97 18,202.28 11.88 16,535.44 10.80 17.00- 8,408.52 9.70 17,772.49 11.60 16,098.78 10.51 14,423.75 9.42 The above table can be concluded that changes in PQI investment cost don't significantly affect changes in value of BCP's share. If the cost of PQI investment is increased by $50 million, the value of BCP's share will be affected by only 6-7% with WACC 13.26% Currently, gross refinery margin (GRM) is highly volatile because crude price and finished oil price have been changed all time since the demand of oil is close to supply of oil. Hence, the Financial Advisor employs changes in all oil product prices in sensitivity analysis in order to see elasticity of price changes to value of equity based on investment cost at USD 300 million. Changing in oil Existing BCP BCP with PQI prices Equity Value Baht/share Equity Value Baht/share (US Dollars per (Million Baht) (Million Baht) Barrel) 0.00 12,089.31 13.94 25,737.57 16.80 0.10 11,252.55 12.98 24,998.83 16.32 0.20 10,415.77 12.01 24,265.10 15.84 0.30 9,556.89 11.02 23,509.25 15.35 0.40 8,691.51 10.02 22,747.35 14.85 0.50 7,825.85 9.02 21,984.76 14.35 Changing in oil Existing BCP BCP with PQI prices % Change in Value % Change in Value (US Dollars per Barrel) 0.10 -6.90 -2.86 0.20 -7.47 -2.94 0.30 -8.24 -3.09 0.40 -9.07 -3.26 0.50 -9.98 -3.37 Normally, once oil price goes down, the GRM of BCP will be reduced. Then when finished oil prices and GRM decreases, the BCP's share price will be decreased accordingly. However, if BCP does PQI, the effect of oil price changes to BCP's share price will be less than doing nothing. In brief, PQI will decrease business risk of BCP business from changes in oil price and GRM. 1.1.4 Market Multiples Analysis Method Market multiples analysis consisting of Price to Earning, Price to Book and Enterprise Value/EBITDA is also another way to evaluate value of BCP's share. The market multiples analysis is based on a past performance of the company and market multiples of comparable companies. However, the comparable companies of BCP are very difficult to find; therefore, the Financial Advisor proposes a weighted average of all market multiples of comparable companies. The comparable companies are PTT Plc., Thai Petrochemical Industry Plc., Rayong Purifier Plc., and Thaioil Plc. However, the comparable companies have different inventory policies as a below table. Normally, a profit of the company, which employs Last In First Out (LIFO), reflects an actual performance better than one, which uses First In First Out (FIFO). For that reason, when price trend is up, the company using FIFO is more profitable than one using LIFO vice and versa. For implementing a better market multiple analysis, the Financial Advisor uses weighted average of market multiples and market multiple of the most comparable company to do the analysis. Summary of inventory policy of each comparable company is follow: Company Name Inventory Policy Bangchak Petroleum Plc. FIFO PTT Plc. Weighted Average Thai Petrochemical Industry Plc. LIFO Rayong Purifier Plc. FIFO Thaioil Plc. LIFO Indeed, all inventory policies are correct and in line with accounting standard certified by auditors but the policy chosen by each company is dependent on consideration of each company management. 1. Price to Earning Ratio (P/E Ratio : PER) The average PER of comparable companies listed above as of August 23, 2005 is approximately 7.83 times. However, the comparable companies used in average PER employ the different inventory policy so a result of market multiples may distort from actual value of BCP. Earning per share is calculated by sum of last 4 quarters since 3Q2004 to 2Q2005. Finally, the Financial Advisor applies fully diluted shares (867.14 million shares) in PER analysis. Unit: Times Company PER PTT Plc. 8.46 Thai Petrochemical Industry Plc. 8.31 Rayong Purifier Plc. 6.46 Thaioil Plc. 8.08 Average 7.83 PER EPS Equity Value Baht per share (Baht per Share) (Million Baht) 6.83 3.57 21,141.14 24.38 7.83 3.57 24,237.60 27.95 8.83 3.57 27,334.07 31.52 The price range of BCP'share calculated by average PER is from 24.38 to 31.52 Baht per share that is too high because average PER may distort the real value of BCP's share by reasons of employing the different inventory policies and excluding future value of PQI or Hydrocracking Project. PQI would help BCP improved product mix to be more valuable by increasing diesel and gasoline and decreasing fuel oil. In order to be more efficient in valuation, the Financial Advisor brings Thaioil that produces similar product and size with BCP but doesn't operate gas station; nevertheless, Thaioil employs LIFO as the inventory policy, which is different from BCP used FIFO, so the Financial Advisor adjusts the difference of the inventory policies by using average discrepancy of the inventory policies since 3Q2004 to 2Q2005. The reason of using average discrepancy is that an average number is smoother and less volatile than a number at a specific time. Other comparable companies cannot directly compare in the market multiple analyses, since they produce different products and have different sizes. PER EPS Equity Value Baht per Share (Baht per Share) (Million Baht) 7.08 1.76 10,830.05 12.49 8.08 1.76 12,359.72 14.25 9.08 1.76 13,889.39 16.02 The price range of BCP's share shown in above table is from 12.49 to 16.02 Baht per share; nonetheless, it may somewhat distort. PER of Thaoil may be slightly higher than that of BCP because oil product mix of Thaioil, which provides less fuel oil, is more valuable than that of BCP. Thaioil also has larger capacity of refinery unit than BCP. Normally, market multiple method doesn't take into account the future investment projects and risks and cannot absolutely get rid of the effect of different accounting method; therefore, the Financial Advisor believes that discount cash flow would be better method. 2. Price to Book Ratio (P/BV) The average P/BV of comparable companies listed above as of August 23, 2005 is approximately 3.26 times. However, the comparable companies used in average P/BV employ the different inventory policy so a result of market multiples may distort from actual value of BCP. Finally, the Financial Advisor applies fully diluted shares (867.14 million shares) in PER analysis. Company Price to Book Value PTT Plc. 3.59 Thai Petrochemical Industry Plc. 4.43 Rayong Purifier Plc. 2.62 Thaioil Plc. 2.41 Average 3.26 P/BV Ratio Book Value Equity Value Baht per Share per Share (Million Baht) (Baht per Share) 2.26 16.32 32,026.36 36.93 3.26 16.32 46,181.66 53.26 4.26 16.32 60,336.96 69.58 The price range of BCP'share calculated by average P/BV ratio is from 36.93 to 69.58 Baht per share that is too high because average P/BV may distort from the actual value of BCP's share by reasons of extraordinary higher book value of BCP which results from lower cost of goods sold in upturn period of oil prices of the company using FIFO. In order to be more efficient in valuation, the Financial Advisor brings Thaioil that produces similar product and size with BCP; nevertheless, Thaioil employs LIFO as the inventory policy, which is different from BCP used FIFO, so the Financial Advisor also adjusts P/BV of Thaoil using LIFO reserve from notes to financial statement of Thaioil 2Q2005. The price range of BCP's share after adjusting LIFO reserve is between 20.67 and 52.72 Baht per share. The price range even after adjusting LIFO reserve is still high because the investors value P/BV ratio of Thaioil more than that of BCP in consequence of refinery unit of Thaioil produces more valuable product mix than that of BCP. In addition, if comparing ratio between P/BV at 0.84 times and ROE at 13.35% after adjusting effect of inventory policy, P/E which comes from P/BV and ROE after adjusting of BCP is around 6.29 times that is close to industrial ratio. The relationship of P/BV and ROE implies that the investor value P/BV of BCP less than other companies in same sector by reason of lower return of equity after adjusting effect of inventory policy. P/BV Ratio Book Value per Share Equity Value Baht per Share (Baht per Share) (Million Baht) 1.23 16.32 17,401.99 20.07 2.23 16.32 31,557.29 36.39 3.23 16.32 45,712.59 52.72 3. Enterprise Value to EBITDA Ratio (EV/EBITDA) The average EV/EBITDA of comparable companies listed above as of August 23, 2005 is approximately 7.65 times. However, the comparable companies used in average EV/EBITDA employ the different inventory policy so a result of market multiples may distort from actual value of BCP. Finally, the Financial Advisor applies fully diluted shares (867.14 million shares) in PER analysis. Company EV/EBITDA PTT Plc. 7.18 Thai Petrochemical Industry Plc. 10.98 Rayong Purifier Plc. 6.13 Thaioil Plc. 6.33 Average 7.65 EV/EBITDA EBITDA Total Liability Equity Value Baht per Share (Baht per Share) per share (Million Baht) (Baht per Share) 6.65 5.61 23.02 12,383.68 14.28 7.65 5.61 23.02 17,245.00 19.89 8.65 5.61 23.02 22,106.32 25.49 The price range of BCP'share calculated by average EV/EBITDA is from 14.28 to 25.49 Baht per share that is too high because average EV/EBITDA may distort the real value of BCP's share by reasons of employing the different inventory policies In order to be more efficient in valuation, the Financial Advisor brings Thaioil that produces similar product and size with BCP. The detail is in following table: EV/EBITDA EBITDA Total Liability Equity Value Baht per share Baht per Share) per share (Million baht) (Baht per Share) 5.33 3.80 23.02 (2,388.80) (2.75) 6.33 3.80 23.02 905.72 1.04 7.33 3.80 23.02 4,200.24 4.84 The price range of BCP's share shown in above table is from (2.75) to 4.84 Baht per share; nonetheless, it may somewhat distort because it is difficult to get rid of all differences of inventory policy. 1.1.5 Summary of all valuation methods The 4 valuation methods to appraise the value of equity are composed if book value, historical market value, discounted cash flow, and market multiples. The book value method doesn't take into account of future projects and profits. It only implies the value of liquidation of the company. So if the investors focus on liquidation value, the book value is also one of the best methods. Likewise, if the oil prices change, the book value of the company will be changed accordingly. For the historical market value method, the prices reflect opinions of retail and institute investors to BCP's shares in regarding to performance, future expectation, PQI, risk, and etc; therefore, historical market value method is a good benchmark too. The discounted cash flow method is the most suitable method to value the company, which has future project and unpredictable operation, because the method take into account of risk and cost of the company and new project thru discount rate (Weighted Average Cost of Capital: WACC) and varying in revenue in cash flow. Conversely, the discounted cash flow method will be good mechanism to value the BCP's share if the assumption used in calculation is realistic. However, if it has any significant changes in environment, the value from discount cash flow method will be changed accordingly. For the last method, the market multiples method is not suitable because it doesn't consider many factors such as accounting policy, revenue and GRM volatilities, future investment, energy replacement and foreign exchange. In short, the first three methods provide better indicators than market multiples method. Valuation Methods Equity Value Baht per Share (Million Baht) (more)