High Conviction: GULF 3Q24: Solid on expansion and huge FX gain

We expect share price to react positively on the strong 3Q24 core profit of Bt4.7bn, +12% YoY (in line with INVX and consensus) and expect another record high in 4Q24 on capacity expansion. It has share price catalysts lying in benefits from the merger with INTUCH that will improve its balance sheet and back bidding for upcoming domestic renewable capacity, plus the start of a cyclic downturn in interest rate. We stay OUTPERFORM with a mid-2025F DCF-based TP of Bt70.0 (4.7% WACC and 1.5% terminal value). GULF is our top pick in the Utilities sector.|

Catalyst #1: Strong 3Q24 core profit, expect another high in 4Q24. GULF reported a net profit of Bt6bn, in line with INVX and consensus, driven by a Bt1.3bn FX gain. Excluding special items, core profit remained robust at Bt4.7bn, +12.1% YoY, supported by increased capacity from GPD Unit 2 (COD: Oct 2023) and GPD Unit 3 (COD: Mar 2024), an improved performance at GULF 1 and higher profit contribution from HKP Unit 1 (COD: Mar 2024) and INTUCH. However, core profit slipped QoQ due to seasonally lower IPP performance and profit. 4Q24 is expected to continue growing a new record on the recognition of profit from GPD Unit 4, (662.5 MW, 70% interest), which started up in early October. Profit will also be aided by the ramp up in commercial operations of the 870 MW and 1,668 MW solar farms with battery energy storage systems (BESS).

Catalyst #2: Merger with INTUCH a plus, as it will lead to greater management flexibility and stronger financial position at NewCo. NewCo is expected to have a significantly improved balance sheet with net D/E slashed to 0.9x from 1.7x in 1Q25 after completion of the merger, as INTUCH is debt-free. This should provide funding capacity to support the government’s huge new domestic capacity additions: Renewable Phase 2 (3.6GW) and PDP2024 (32GW in renewable energy).

Catalyst #3: Share price supported by lower interest rates. Although share price has surged 45% since the beginning of the year, we expect sentiment to be improved by the start of a cyclic downturn in global interest rates, which will benefit the utilities sector, whose capital-intensive nature mandates a high level of debt funding (typically a 3:1 D/E).

Action & recommendation. GULF trades at only 40.5x 2024 PE or -0.5 SD of its 5-year historical PE mean. We remain positive on the solidity of GULF's earnings for the next 1-2 years and maintain our Outperform rating with a mid-2025 DCF-based TP of Bt70/share (4.7% WACC and 1.5% terminal value).

Key risks: 1) Lower than expected investment return on new projects, but GULF’s excellent track record in bringing projects in on time and on budget minimizes this risk, 2) SPP electricity and steam sales to industrial customers, exposed to a poor economy and fuel costs, and weather-related risk at renewable power projects. Key ESG risk is the environmental impact from its exposure to fossil fuels.