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PTT Global Chemical

4Q13F: Net profit could fall QoQ BUY

PTT Global Chemical Plc (PTTGC)

Net profit down sharply QoQ on FX loss and no huge stock gain. We estimate a slight QoQ improvement in recurring net profit on higher utilisation rate and better product spread, especially for olefins business. However, lower stock gain and more FX loss will push net profit down 27% QoQ and 28% YoY to Bt7bn. Despite this, we still believe PTTGC is more competitive than peers in terms of feedstock cost as well as production efficiency, benefiting from business synergy for its refinery, aromatics plants and olefins crackers. In our view, the market has largely priced in the weaker 4Q13F, as share price has dropped 12percent since the end of last year, underperforming local peers (-4.3%) and the market (-2.6%). We still expect earnings growth of 23% YoY in 2014F. Buy rating is maintained with TP of Bt92.

Utilization up in every segment. 4Q13 operations improved QoQ with most units operating full out - from the oil refinery (103%) to polyethylene (99%). Utilization of the olefins cracker returned to 90% in 4Q13 after falling to 75% in 3Q13 due to shortage of feedstock from PTT. This helped lift production of downstream products to 99percent from 88% in 3Q13. Utilization rate for aromatics plants also increased to 93% in 4Q13F from 91% in 3Q13 despite weakening product spread.

GRM and olefins spread better QoQ. Despite the 22% QoQ fall in Singapore GRM in 4Q13 to US$4.28/bbl, we expect PTTGC's market GRM to be stable at US$3.5/bbl, thanks to favorable crack spread for middle distillates products. Together with a marginal stock gain, accounting GRM will fall to ~US$4.1/bbl in 4Q13 from US$8.68/bbl in 3Q13. Product spread for olefins and derivatives continued to improve by 4-9% QoQ.

2014F: steady gain in operating performance. We expect a higher operating rate in 2014F as there is no major maintenance shutdown scheduled for the year. A normal flow of gas from PTT's gas separation plants will ensure smoother operations for PTTGC's olefins crackers after the production disruption in 2H13. Also positive for profit is a favorable spread for olefins and derivative products, which is expected to be sustained at current levels due to well-balanced demand/supply. Key concerns remain focused on aromatics spread due to market anxiety on new supply and potential stock loss if oil price continues to decline from current levels.

Co-investment with IRPC remains in early stages. Management confirms news it is discussing a potential joint investment with IRPC but states that this is in very early stages, with a feasibility study being conducted for the expansion of the aromatics plant due to the current excess heavy naphtha feedstock from its plant and potential feedstock from IRPC's plants after Phoenix winds up in 2015. Management said there is no financial commitment at this stage.

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