LNG And Renewable Energy Investments Will Improve Competitiveness But Face Regulatory Challenges

Key Takeaways

• Strategy to expand LNG business and invest in renewable energy could boost revenue and improve net margins through operational synergies and efficiency gains.
  
• Diversification into non-hydrocarbon ventures and focus on AI-driven operational excellence aim to enhance competitiveness and support long-term growth.
  
• The competitive and regulatory challenges, coupled with volatile oil prices and economic slowdowns, threaten PTT's revenue stability and profitability.

Catalysts

Engages in petroleum business in Thailand, rest of Asia, Europe, the Americas, and internationally.

• PTT's strategy to expand its LNG business by creating new growth opportunities and streamlining operations, including exploring promising locations in Malaysia, Thailand, and UAE, is expected to boost revenue by leveraging new supply sources and achieving operational synergies.
  
• The investment in renewable energy, through initiatives like decarbonization and hydrogen integration into its energy mix, is anticipated to support future net margin improvements by reducing carbon intensity and increasing efficiency in its power segment.
  
• The ongoing restructuring of PTT's downstream operations and focus on asset-light investment directions aim to enhance global competitiveness and align portfolio strategy, potentially leading to improved earnings resilience even in an oversupplied market.
  
• PTT's move towards non-hydrocarbon ventures such as the EV value chain could diversify revenue streams and capitalize on emerging green energy opportunities, propelling long-term revenue growth as electric mobility gains momentum.
  
• Operational excellence initiatives, including digital transformation and the deployment of AI technologies, are expected to uplift EBITDA by optimizing processes, reducing operational costs, and enhancing overall efficiency across the PTT Group.

PTT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PTT's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.6% today to 3.2% in 3 years time.
• Analysts expect earnings to reach THB 100.6 billion (and earnings per share of THB 3.53) by about December 2027, down from THB 113.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting THB 137.0 billion in earnings, and the most bearish expecting THB 71.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.0x on those 2027 earnings, up from 8.1x today. This future PE is greater than the current PE for the TH Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.4%, as per the Simply Wall St company report.

PTT Future Earnings Per Share Growth

Risks

• The competitive environment in the oil and petrochemicals sectors, compounded by an oversupply, poses a significant challenge to PTT, potentially impacting trading revenues and net margins.
  
• The company’s dependence on regulatory environments, particularly in the gas business, could lead to uncertainties affecting revenue stability and net income if regulatory conditions or policies shift unfavorably.
  
• The effects of fluctuating global oil prices, as seen in diminished stock profits and oil price predictions, could impede PTT's revenue and profitability if prices remain volatile.
  
• Asset divestments and impairments, such as those recorded in chemical investments, suggest potential revenue and earning volatility, highlighting risks in asset management and investment strategy.
  
• External economic factors, such as the risk of economic slowdown and decreasing global refinery margins, threaten to limit revenue growth and net income, impacting PTT's overall financial performance.

Valuation

• The analysts have a consensus price target of THB 37.21 for PTT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of THB 43.0, and the most bearish reporting a price target of just THB 29.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be THB 3184.9 billion, earnings will come to THB 100.6 billion, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 12.4%.
• Given the current share price of THB 32.25, the analyst's price target of THB 37.21 is 13.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.