First Read: Thailand Energy "Ex-refinery diesel discount raised to..."

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First Read: Thailand Energy "Ex-refinery diesel discount raised to..."

Valuation Method and Risk Statement

Oil prices, refining/marketing margins and petrochemical spreads can be volatile, highly

cyclical and seasonal in nature. Therefore, changes to our outlook for global GDP growth or

seasonal demand can materially impact our earnings expectations for ASEAN oil and chemical

companies. Exchange rate fluctuations could change earnings and valuation expectations as

oil and chemical products are priced in US dollars. Given that many companies are expanding

capacity and these are large-scale projects, execution and sharp rises in interest costs could be

key risks. Furthermore, foreign investment and M&A risks exist. There are risks related to

government policy changes. We believe government intervention in product pricing is a risk in

the event of government change or a material spike in global oil prices, particularly for oil

distribution companies and in regulated countries. Plant mechanical failures and power

supply shortages are key risks for oil and chemical manufacturers. We use a target PBV

multiple approach to value PTTGC and TOP.

For PTTGC, key downside risks include: 1) quick normalisation after Strait of Hormuz

reopening, 2) a worse-than-expected chemical demand and margin recovery; 3) slower-than-

expected execution of global capacity rationalisation; 4) a worse-than-expected profit uplift

from its cost enhancement plan; 5) limited cash flow support and finance cost reduction from

its asset monetisation plan; and 6) lower netback pricing profit and support from the parent

company.

For TOP, upside risks include: 1) a strong gross refining margin recovery through a rebound in