Morgan Stanley (MS) has upgraded Thai Oil Public Company Limited (SET: TOP) to Overweight, seeing refining upcycle, rebounding domestic demand, balance sheet repair and low expectations are all aligning to drive the next leg of inflection and raise confidence in upcycle.
MS wrote in its research, stating that refining margins have gone from above peak to trough cycle headline margins over the past two quarters, which raised scepticism from investors toward its view on the refining upcycle. However, the firm still believed that supply side would remain strong as demand adjusts to the new price normal.
Although headline refining margins have volatility of 25% daily in Asia, MS believed strength in diesel margins and quick recovery in gasoline margins in the past few weeks does underline marginal cash cost economics in play as the majority of global refiners are struggling to raise their utilization rates.
In this regard, Morgan Stanley upgraded TOP’s rating to Overweight and raised target price to THB65 from THB57 per share as the company has the highest exposure to middle distillates, among Asian refining peers and should be a key beneficiary of the upcycle in refining margins over 2023-24. The firm saw balance sheet challenges receding as capex peaks, while significantly higher cash flows and proposed recapitalization in 2H22 drive rapid de-gearing.
Furthermore, Morgan Stanley thought that the stock is pricing in the refining upcycle but not upside risks from improving domestic demand and balance sheet repair.
The firm raised its gross refining margin estimates 95%, 15% and 6% for 2022, 2023 and 2024, respectively, reflecting the upcycle in refining margins. MS also raised earnings forecasts 126% for 2022 and 26% for 2023, while the result is expected to remain flat in 2024.