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PTT

Cheap valuation with strong outlook BUY

PTT Plc

Buy with SOTP based TP of Bt400. We see its current valuation as undemanding at 2014 P/E of only 8.5x vs. 12x for regional peers. 1Q14 profit proved its competency in delivering a consistently strong performance despite business interruption from the political rally and earnings hiccups at associates. Key risks are volatile oil price and weaker than expected performance of associates.

Strong 1Q14 amidst business disruption. Management stressed that 1Q14 profit of Bt27bn was on track with historical earnings of ~Bt100bn p.a. although it did activate business contingency management (BCM) due to the political rally. GSP5 resumed full operations in late 1Q14 and this will have a full quarter impact in 2Q14. Profit from PTT alone is able to offset slowdowns in associates' oil refining and petrochemical businesses, which were hurt by sharp decline of PX price and spread.

Slower 2Q14 on maintenance by associated refiners. PTT expects the prolonged political uncertainties to continue to hurt the overall economy and adversely affect demand for electricity and natural gas in 2014. Still, gas demand reached a new record of over 5,000mmcfd in 2Q14 due to abnormally hot weather. Demand for NGV has also increased due to high oil price which encouraged users to switch. 2Q14 profit will be affected by major turnarounds of associated oil refiners, i.e. TOP's CDU3 in Jun-Jul and BCP's refinery in May-Jun. Coupled with weak PX price, contribution from associates will continue to weaken. Note that PX capacity under PTT group is nearly 2mtpa.

IPO of GPSC could be delayed to 2015. Five power assets under PTT were transferred to GPSC in 1Q14 and the remaining two, i.e. a 15percent stake in Ratchaburi Power Co., Ltd (RPCL) and 40% in Nam Lik 1 Power Co., Ltd (65MW hydro power plant), will be transferred in 2Q14. This will raise GPSC's capacity to 1,272MW by end-2Q14 from 1,038MW at end-2013. PTT held 30.1% in GPSC at end-Mar 2014. We believe the delay of this IPO is due to the political morass, which has damaged market sentiment, but also from delays in processing the listing.

Divestment of non-core assets underway but could take time. It continues to plan to sell its stakes in non-core oil refining companies SPRC and BCP to enable freer competition in the retail oil market but has not provided an exact time frame. Sale of SPRC (36% interest) will be via a public offering which requires the government's approval and the legal assessment that the public offering would not breach the Construction and Operation Agreement (COA) signed between PTT and Chevron (holds 64% in SPRC) and the government. As for BCP, management did not disclose any definite timeframe or method but said it is open for negotiations over the sale of BCP if the price is attractive. PTT is currently the major shareholder of BCP with 27.22% interest, buying into BCP in 2002 at an average cost of Bt14.9/share and book value of Bt26.83/share.




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