Bualuang Securities views Thai Oil’s cancellation of the contract with UJV as a move that alleviates concerns over the Clean Fuel Project (CFP) to some extent. The firm notes that Thai Oil Public Company Limited (SET: TOP) remains the most favorable stock in the refining sector due to its uninflated stock valuation.
It is expected that most of the subcontractors will be the same ones previously involved in the CFP project, such as Sriracha Construction Public Company Limited (SET: SRICHA), Stecon Group Public Company Limited (SET: STECON), CAZ (Thailand) Public Company Limited (SET: CAZ), and TRC Construction Public Company Limited (SET: TRC). If these subcontractors are retained, it would bode well for them, especially those who had liquidity issues due to overdue payments from UJV.
For instance, STECON, as a subcontractor for the CFP project, has already set aside a reserve of approximately 1 billion baht due to outstanding payments from UJV, with a monthly increment of 9-10 million baht over the first four months—an amount anticipated earlier.
With TOP proceeding further with the project, there is an opportunity to engage new Engineering, Procurement, and Construction (EPC) contractors. Existing subcontractors have more than a 50% chance of continuing their work depending on the price, with STECON’s pending work valued at approximately 2.5 billion baht. Any legal action against UJV will proceed through arbitration, expected to take over a year.
Meanwhile, this matter has limited impact on STECON as it has mainly allocated reserves already, which unlocks the CFP project to proceed.
Suwat Sinsadok, Managing Director of Globlex Securities, stated that Thai Oil’s cancellation of the existing EPC contract, due to a breach by the contractor, indicates legal checks have likely been completed to prevent a countersuit. This positively signals the CFP project, as previous hurdles are now removed, allowing the project to progress.
It is anticipated that Thai Oil has begun the process of finding a new contractor, which is likely to be from Western countries or Japan and not from China or Korea. Subcontractors are likely to prefer working with familiar partners. It is estimated that approximately 80-90% of the former subcontractors will return for the new phase of the CFP project, particularly Thai firms with specialized expertise like SRICHA, which are expected to continue subcontracting.
The delay in the CFP project has significantly impacted TOP’s stock price, which previously stood at around 50 baht. However, the contract termination with UJV and the search for new contractors are seen as positive developments which may help the share price to recover, likely returning to approximately 50 baht. Nevertheless, whether the stock price increases significantly will depend on the progress of the new project.
There are speculations that this development could lead to an adjustment in TOP’s credit rating. Yuantai Securities (Thailand) mentioned that during May-June, Standard & Poor’s (S&P) and Moody’s will review the credit ratings, currently TOP is at BBB with a negative outlook and Baa3 with a negative outlook, respectively. These levels are two and one notches above Non-investment Grade, respectively.
