Tupras | Upgrade to Buy: Weaker TRY shifts balance of risk

Exceptionally strong refining margins… Tupras continues to enjoy exceptionally strong refining margins on the back of strong gasoline and diesel crack spreads,
which more than offset higher energy costs and softer domestic demand for bitumen and, therefore, weaker spreads. There has been a notable correction in diesel
spreads as more and more capacity is likely coming back from maintenance, but the diesel market could remain tight for some time, given weaker refining runs in Russia and the recent dislocations in the global oil trade (see Oil markets: Russian oil supply loss drives record refining margins, 18 May 2022).

…and almost binary outlook for profitability. Yet, we continue to believe that the outlook for refining profits is uncertain, given fuel price inflation and possible fiscal
risks (see Tupras: So binary, 28 April 2022), which has already materialised in a number of countries and affected both upstream and downstream activities (see
Integrated oils: UK windfall tax comes with big investment allowances, 27 May 2022, and MOL Group: Normalised at a strong level, 27 May 2022).

But a weaker TRY could improve the balance of risks. Nevertheless, the recent TRY weakness could improve the balance of risks for Tupras as its share price has been largely flat in TRY terms since April whereas Tupras’ economics are largely USD-denominated and refining margins have remained strong. Having said that, we
don’t necessarily expect a weaker TRY to improve profitability in the medium term as most of the company’s operating costs are effectively USD-denominated. We also note that a weaker TRY could imply near-term negative risks for financials but
possible operating FX losses are normally offset by inventory-related gains in subsequent quarters.

Raise target price to TRY310 (from TRY220); upgrade to Buy (from Hold): With this note, we reflect stronger oil product crack spreads and the weaker TRY year-to-
date, which drive stronger financial estimates: we raise our target price to TRY310 (from TRY220). Tupras continues to trade at depressed FX-adjusted P/B multiples (charts inside) and could, in our view, offer strong dividend income (with respect to 2022 results), if the current macro environment is sustained.


HSBC Global Research