TUPRS TI | Downgrade to Hold: Low season

Strong rally: Tupras’ share price has rallied 45% in USD terms (vs. a c.5% gain in
the Borsa Istanbul 100 Index) from the beginning of 3Q21, helped by a strong
recovery in oil product crack spreads on the back of stronger demand and weaker
supply factors (see EEMEA Oil and Gas Chartbook: Not so fast, dated 4 Nov 2021).
Importantly, Tupras’ margins have been relatively immune to cost pressures
experienced by some of its peers in Europe which have seen faster energy cost
inflation (see Tupras: Strong diesel cracks, slow energy costs inflation, dated 19 Oct
2021) and higher carbon emission costs.

What is next?: The stock is trading again at an FX-adjusted P/B multiple of c.0.7x, in
line with the level in Q420 but still much lower than the 2009-19 average of 0.94x. It’s
still not expensive, we believe, and the demand recovery could prove to be a more
important factor than supply-related risks. Yet, Tupras’ valuations are now higher or
in-line with those of its more diversified peers.

The sector is entering a low season with a possible correction in key oil product crack spreads: although the impact of gas-to-oil switching could persist throughout the heating season, we also note the improved domestic coal supply in China (see Commodities Unearthed – mainland China Oct’21 trade, dated 9 Nov 2021). The recent 48% gas price hike came faster than we expected, adding to the near-term cost pressures, though with limited implications for our 2022e gas price estimates for Tupras as we expected similar gas price levels from 1Q22e. The upcoming release of the Strategic Transition Plan on 24 Nov 2021 could be an interesting event addressing the sector-wide risks related to longer-term demand trends and, importantly, the company’s current carbon emissions profile. Transitions are normally not cost-free: one of the possible near- term outcomes for Tupras could be near-term capex inflation.

Raise TP to TRY170 (from TRY168), downgrade to Hold (from Buy): With this
note we update our model to reflect largely in-line 3Q21 financial results and the
weaker TRY to date. We also reflect HSBC’s latest Brent price assumption of
USD75/b, flat in real terms from 2022e (from USD65/b, see Oil market outlook: Spare
capacity diminishing; raising price forecasts, 9 Nov 2021). We raise our target price
to TRY170 (from TRY168) and downgrade our rating to a Hold (from a Buy
previously) given a possible seasonal correction in refining margins and capex
inflation risks which we also reflect in our estimates.

HSBC Global Research