Daily Brief Energy/Materials: Tipco Asphalt, Vedanta Resources and more

• We keep our SELL rating with a new TP of Bt14.50(+4% from prior TP),as we rollover to 1.41xPBV’23E, which is -2SD of its 5-yrs trading mean.Strong QoQ growth in  2Q22
• 2Q22 core profit posted strong QoQ Excluding extra items, its core profit was at Bt622m (-14%YoY, +250%QoQ). The strong QoQ rise was far above our expectation
• Neutral tone from the analyst meeting The management reaffirmed its sales volume guidance for asphalt at 1.20m tons in 2022E (-3%YoY), while its 1H22 volume is at 0.56m tons.

We view Vedanta Resources Limited (VRL) as “High Risk” on the LARA scale, mainly due to the difficulty in upstreaming cash to service debt at the holdco level, as well as the volatility in commodity prices. The company’s fundamental credit profile is supported by: [1] a large and diversified resource asset base; [2] production efficiency, with sound earnings and cash-flow capabilities, though segmental contributions fluctuate from year to year; and [3] sound liquidity.

Conversely, VRL’s risk profile is impacted by: [1] the complex corporate structure, with related-party transactions; [2] regulatory risks (especially in the aluminium and iron ore segments); and [3] the inherent volatility of commodity prices. Holdco creditors are highly dependent on a continued stream of dividends or intercompany loans from subsidiaries.

Our Credit Bias is “Stable”, as further improvements in the financial risk profile may be inhibited by a recent correction in commodity prices and the increasing likelihood of recessions in major economies.

The ESG Impact on Credit is “Moderately Negative”, as the metal & mining industry is exposed to regulatory and geopolitical risks. For VRL, these risks are exacerbated by the fact that the company has operations in many countries, including areas with high political risks (e.g. Zambia and South Africa). Moreover, the industry faces extreme scrutiny from environmental agencies, given its negative impact on the environment. Controversies are “Immaterial”, albeit we note Governance or Environmental issues at certain subsidiaries.