2008 will be the year of PTT, analysts say

Fourteen of the 15 brokers in the Securities Analysts' Association consensus updated their recommendation on PTT's stock in May to "buy", with a target price in the range of Bt380 to Bt474. The odd one out of the 15, Kim Eng Securities (Thailand), recommends "trading buy" with a fair value of Bt420.

High global oil and gas prices and capacity expansion by affiliates will drive PTT's 2008 earnings, the analysts say. PTT is Thailand's largest energy conglomerate. Its earnings have constantly increased. Last year it recorded a net profit of Bt97.80 billion, up from Bt95.26 billion in 2006, Bt85.52 billion in 2005, and Bt62.67 billion in 2004.

PTT is Thailand's sole importer of liquefied petroleum gas (LPG), and it expects later this year to be compensated for the difference between domestic and global prices for cooking gas. The global LPG price is more than US$800 (Bt25,600) per tonne, while the domestic ex-factory price is fixed at $332.

Compensation for this difference is expected to be made following the implementation of a domestic dual price for LPG, expected in July this year, when the supply of natural gas for vehicles (NGV) is adequate.

The brokers say that besides PTT having lost opportunities to benefit from the rising global price for LPG, the possible deferral of the two-tier pricing plan remains a concern.

Because of its status as the national oil firm, PTT must also shoulder losses from its retail oil business as it holds back on price rises to alleviate the burden on consumers. However, the retail oil business accounts for only a small portion of PTT's total earnings.

KGI Securities (Thailand) has maintained an "outperform" rating for PTT's stock, with a target price of Bt460. "In our view, the progress on the execution of the court's ruling should more or less remove concerns about its impact on PTT's operations and earnings in the future," the broker said.

PTT has reported that its gas business earnings before interest, tax, depreciation and amortisation were Bt13.5 billion in the first quarter of this year, up by 21.1 per cent year on year and by 1 per cent quarter on quarter, driven mainly by gas sales volume and the performance of its gas separation plants.

As expected, the earnings prove that PTT's gas business has felt no huge impact from the court's ruling and continues to be a core value creator, even though the company had to transfer some of its gas pipelines to the Finance Ministry, the broker said. Moreover, the annual rental charge for the transferred assets will range from Bt180 million to Bt550 million, which is infinitesimal compared to the broker's 2008 earnings forecast of Bt102.1 billion.

The broker said that if the two-tier LPG pricing policy is implemented, PTT will definitely gain from selling at a higher price. The policy will encourage a more liberalised market and remove concerns about the current policy cutting into PTT's earnings.

KGI Securities has revised its 2008 and 2009 earnings forecasts for PTT upwards by 4.5 to 4.7 per cent, after adjusting its oil price assumptions to $80 and $75 per barrel, respectively. ACL Securities has reiterated its "buy" recommendation on PTT's stock, with a target price of Bt411, based on the sum-of-the-parts method.

The broker believes that PTT's 2008 normalised earnings will surge by 11.6 per cent year on year to Bt96.86 billion, on the back of strong growth in its gas and refinery businesses and stable earnings contributions from its petrochemical business, following capacity expansion.

PTT's third gas transmission pipeline, which will be running at full capacity in the second quarter of this year, and PTT Exploration and Production's "leapfrog earnings growth" in 2008 will give a big boost to PTT's full-year earnings, the broker said.

Meanwhile, Dow Jones Newswires has reported that Credit Suisse has upgraded PTT to "outperform" from "neutral", and has raised its 12-month target price from Bt352 to Bt430, on undemanding valuations.

The broker revised upwards its earnings forecasts for PTT in the years 2008 to 2010 by 9 to 15 per cent."We see the possibility of the share price overshooting our [target price] in the short term," the broker said.