Brokers' take: DBS positive on Thai energy stocks as cheap valuations a draw

THE Thai energy sector will likely rebound with prices of crude oil, petroleum and petrochemical products recovering alongside fuel and chemical demand due to an increase in economic activities, DBS Group Research said.

In a research note on Monday, analyst Duladeth Bik had an "overweight" rating on the sector, noting that it has a cheaper valuation of 15.5 times the brokerage's estimates for FY2021 earnings, compared with the Stock Exchange of Thailand's (SET) 19 times and regional peers' 17 times.

Particularly, Mr Bik expects renewable energy players with exposure to downstream businesses will benefit from the development of a national energy plan that includes higher power capacity from clean energy sources and promotes the use of electric vehicles.

Noting that most energy players have expanded their business elsewhere in Asia in the last few years due to political uncertainties, Mr Bik said the development will likely draw investments in domestic power plant projects due to more attractive tariff rates, and provide downstream business opportunities in areas including transmission grids and batteries.

The analyst also noted that prices for oil may remain volatile in the short term due to fears over a sluggish fuel demand recovery amid the Delta variant outbreak.

Nevertheless, there are limited downside risks due to a flattish supply from non-OPEC countries, a fall in inventory levels in many countries, the successful containment of the Delta variant in China, and a resilient fuel demand growth forecast, he said.

Mr Bik also expects the aromatics chain business to remain strong on the back of a low benzene inventory in China, resilient demand for textile, electronics, healthcare, homecare and packaging materials, and strong demand for hygiene products and single-use plastic during the pandemic.

However, he noted that overall refinery and chemical margins may be softer in the second half of 2021 due to rising crude and feedstock costs, along with new refinery supply from Asia and the Middle East and new chemical supply from China.

Margins may also be weighed down by a slower recovery in domestic jet fuel demand, due to the slow recovery of the Thai aviation sector, he added.

The analyst's overall top picks for the energy sector are Global Power Synergy (GPSC) and PTT Exploration and Production (PTTEP), where he has a "buy" call on both stocks and a target price of 98 baht and 156 baht, respectively.

GPSC will likely gain ample downstream business opportunities from the national energy plan and should see limited negative impact from the Delta outbreak in its Q3 performance due to its long-term off-take contracts.

Shares of GPSC were trading at 82.50 baht as at 12.22pm SGT on the SET on Wednesday, down 0.75 baht or 0.9 per cent.

Meanwhile, PTTEP will benefit from an uptrend in crude oil and natural gas prices amid recovering global oil demand, and will likely post strong Q3 core earnings due to an expected rise in average selling prices.

Shares of PTTEP were trading at 111 baht, down 0.50 baht or 0.5 per cent.

For the chemical section, Mr Bik named Indorama Ventures as a top choice, and has a "buy" call and target price of 59 baht on the counter.

He expects 60 per cent of its business will benefit from a strong polyethylene terephthalate demand, and its geographical diversification across Asia, Europe and the US will allow it to offset softer margins in Asia with resilient margins in Europe and US.

Indorama Ventures shares were trading at 43.25 baht, down 0.50 baht or 1.1 per cent.

For the refinery section, Mr Bik recommended Thai Oil as it has the lowest operating cash cost, and also has greater refining flexibility and exposure to the solid aromatics segment.

With a "buy" call and target price of 67 baht on the stock, he expects the company will see the least impact from rising crude premiums compared to peers. Thai Oil was trading at 49.50 baht, down 0.25 baht or 0.5 per cent.

Among key players in the service station section, the analyst likes PTG Energy as few of its service stations are in areas adversely affected by work-from-home measures, and has a strong customer base.

He has a "buy" call and target price of 22 baht on PTG Energy, noting that the sell-off in the stock is likely overdone. Shares of PTG Energy were trading at 18.10 baht, down 0.2 baht or 1.1 per cent.

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