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Energy : Petrochemical

Up Fx rate assumption to B33/US$, boosting FY2014 profit growth to 19.8%yoy Neutral

Energy : Petrochemical

- Political unrest triggers further fund outflow, weakening Baht beyond expected

The Baht has been depreciating over the past two months, softening

averagely by 6.7% to B33.08/US$, reflecting an outflow of foreign fund

from Thailand to other countries that have given higher returns. Moreover,

the inconclusive political problem, starting since October 2013, has not

only hindered the government's investment but also affected domestic

private investment. Accordingly, we slash our FY2014 GDP growth forecast

from 4.3%yoy to 3.3%yoy. In addition, it is possible that the MPC might

cut the policy interest rate by another 0.25% at its coming meeting. All

these are key factors making the Baht weaken continuously. Therefore, we

revise our Fx rate assumption to B33/US$ from B31.5/US$ previously.

- Up Fx rate assumption to B33/US$, beneficial for profit in FY2014-2015

The rapidly weakening Baht will be beneficial for net profit of the energy

and petrochemical sector as more than 90% of its income but only 60-

70% of its cost is in US Dollar. Consequently, we revise up 2014-2015

earnings forecast of stocks in the sector by 3.44% and 2.97%,

respectively, in order to reflect the weaker-than-expected Baht. Under the

new forecast, the sector's net profit in 2014-2015 would grow as much as

19.8%yoy and 8.6%yoy, respectively. The profit growth of each company

would be quite close to one another's and the sector's average. However,

the notable profit growth in 2014 would not only result from the weak Baht

but also higher sales volume from new project (PTTEP) and full resumption

of refineries, gas separation units, and petrochemical plants after the

planned and unplanned shutdowns in 2013 (PTTGC and PTT).

- NEUTRAL. PTTEP and PTTGC are top picks

We assign NEUTRAL for the sector. Top picks are PTTEP(FV@B220.07) and

PTTGC(FV@B91.78) as their profits are projected to show the largest

growth among peers, respectively at 19.8%yoy and 25.3%yoy and their

2014 PERs are only 8.3x and 9.1x, lower than the regional average of 12x.

Moreover, the share prices have declined significantly, against recovering

regional peers as a response to the reviving world economy, so PTTEP and

PTTGC are interesting for investing. Furthermore, they are also lowly

sensitive to domestic political factors.


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