Vietnam Strategy: Higher oil prices should be positive for O&G, negative for airlines
06/01/2020 - 09:37
► Recent events in the Middle East raise the potential for sustained higher oil prices.
► Higher oil is a moderate macro risk given the implied impact on Vietnam’s balance of payments and reduced global demand.
► By sector, the news is positive for O&G and negative for transport, but largely neutral for energy suppliers.
► We still expect a seasonal rally around the Tet holidays, supported by the launch of the VN Diamond ETF (probably in February).
► But the “risk off” trade suggests FINI net selling may continue.
► PVD is our top pick on higher oil prices. POW and NT2 should be able to pass higher input costs to the buyer. We would be cautious on the airlines in the short term.
Escalated Middle East tensions. The prospect of yet another sustained military conflict appears broadly negative for global investor risk appetites. However, we think the direct impact on the Vietnam market should be somewhat muted given our view that investors are already underweight Vietnam stocks. However, the prospect of sustained oil price increases in the medium term suggests a moderate macroeconomic headwind given the implied impact on Vietnam’s balance of payments and, more broadly, global demand.
Brent crude is currently trading on US$70 per barrel, up 6% from its close of Thursday, Jan 2 (i.e., prior to the US airstrike in Baghdad). Our view is that the nature of the strike, which killed Iran’s top military commander, suggests that tension is likely to remain high in the region in the medium term. This suggests that higher oil prices could be sustained.
Negative for energy hungry industries. Leaving aside the broader macro impact for now, we think that transport stocks may come under particular pressure. This includes the largely unhedged airlines VJC and HVN (both not rated), whose ability to pass higher input costs on to customers may be tested in the months ahead.
Neutral for power suppliers (e.g., POW (BUY) and NT2 (HOLD-OP). Although higher input costs could negatively affect sentiment for these names, the actual operational impact should be limited given their contracted ability to pass energy input costs on to the electricity buyers (i.e., EVN subsidiaries) who make up 80% of electricity sales and likely pricing power in the spot market (20% of sales) given the undersupply.
Positive for oil & gas producers. PVD is our top pick on higher oil prices, which should benefit sentiment on the stock and potentially boost lease rates if it continues. This could restore PVD’s historically high correlation with Brent crude (which declined in 2H20 on persistent foreign net selling). We believe that the stock’s recent weakness (-16.3% since announcing the Brunei contract) presents investors with an attractive entry opportunity. PVD trades at 19.9 PE and 0.5 PB, and we see 30.9% upside to our fair value-derived target price. GAS (not rated) could also benefit, given the positive implications for the take-or-pay agreements with power producers.
Higher oil — Positive for PVD, negative for airlines2