PTT Global Chemical

Sustainable spread recovery to prompt further re-rating

Investment thesis

We expect PTTGC's share price rally to continue in the near-term, driven by market anticipation of strong 4Q12 earnings and rising chemical spreads (brought about by seasonally high demand). Over the longer-term, if the global economic recovery is sustained, demand for chemicals will expand, spreads will fatten and the sector will re-rate. There is also scope for upside to PTTGC's long-term earnings from synergistic benefits. The stock currently trades at an FY13 PER of 9.7x and an FY13 EV/EBITDA of 6.2x, discounts to the regional means of 13.7x and 7.5x, respectively.

Expanded expectations for 4Q12 earnings

PTTGC's 4Q12 earnings now look set to beat the Bloomberg consensus, buoyed by fatter aromatics margins and stable olefins spreads (even though the Ethane price rose US$40/t), despite a weaker GRM and lower olefins sales volume (due to a planned shutdown). We preliminarily estimate a strong 4Q12 core profit of Bt9bn, up 137% YoY and flat QoQ (the street core earnings estimate is only Bt7bn). Fatter QoQ aromatics margins brought about by improved demand in the face of tight supply should offset the impact of a weaker GRM and lower sales volume.

Seasonal demand pushed up spreads; eyes on post-CNY climate

Chemical spreads in 1Q13-to-date, both aromatics and olefins, have increased QoQ, led by HDPE (up 10%), PX (up 13%), Benzene (up 30%) and MEG (up 41%). Restocking demand ahead of Chinese New Year in the face of tight supply is the driver. If demand were to continue to rise following Chinese New Year in Feb, it would strongly indicate a sustainable recovery, rather than a seasonal blip. In that case, chemical spreads would be expected to continue their uptrends.

Better demand outlook & tight supply prompt profit upgrades

The global economy has posted signs of improvement over the past few months, particularly the US and China. We think these factors will support a sustained chemical demand recovery going forward. Apart from the improved demand outlook, chemical supply dynamics are expected to remain tight for part of this year, due to unplanned shutdowns at several plants and postponed start-ups for some new facilities, such as Tenglong Aromatics 2 (China; 800kta; from 3Q12 to 2Q13).

We have, therefore, revised up our spread assumptions and upgraded our earnings forecasts by 18% to Bt35,179m for FY13 and by 19% to Bt37,164m for FY14. As such, our YE13 DCF-derived target price raises to Bt90 (from Bt74).