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PTT Global Chemical

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PTT Global Chemical Plc (PTTGC)

Investment thesis

PTTGC's recent share price underperformance is unjustified, given that: 1) its earnings should bottom out in 1Q14, 2) QoQ profit growth momentum is expected to be sustained through 3Q14, 3) the olefins market has entered an uptrend and 4) PX margin should rebound in 2H14. We think the market is too concerned over the weak PX price and the possibility of a new round of mergers within PTT group—if there were to be a merger with IRPC, it would be after 2015 and it would have to create value for the firm. The current valuation is undemanding—an FY14 PER of 9.8x, a steep discount to the regional average of 18x. Furthermore, PTTGC's dividend yield for FY14 of 4.6% is significantly above the Asian mean of 2.9%.

1Q14 earnings to be the weakest quarter of FY14

The bottom-line is expected to report its weakest period of the year for 1Q14—we model for Bt6,562m, down by 46% YoY and 12% QoQ, and core earnings of Bt6,315m, down 40% YoY but up 12% QoQ. The anticipated YoY core profit contraction is due to: 1) a slimmer market GRM, 2) weaker aromatics spreads, 3) a lower MEG spread and 4) lower olefins sales volume—there were maintenance shutdowns at several olefins plants during the quarter. The assumed YoY drop in net profit was due to a lower FX gain and smaller gains on derivatives.

The key drivers of the modeled QoQ core earnings growth were a fatter market GRM, fatter olefins spreads and a fatter Benzene spread. We assume an inventory loss in 1Q14 against an inventory gain in 4Q13—the key reason for the QoQ bottom-line contraction.

QoQ earnings growth momentum to be sustained through 3Q14

The expected YoY and QoQ earnings growth will be driven by greater olefins sales volume, fatter olefins spreads and improved aromatics margins. Olefins sales volume growth (due to fewer maintenance shutdowns and more gas feedstock from PTT's GSP#5) will lead 2Q14 core profit growth, while seasonally fatter chemical spreads will be the key factor in 3Q14 core earnings expansion. The HDPE spread in 2Q14-to-date is up by 21% YoY and 2% QoQ to US$633/t. In contrast, the PX spread has dived by 56% YoY and 25% QoQ to $290/t for the same period.

Share price re-rating expected on a higher HDPE price

As this year marks the start of a new olefins up-cycle and the HDPE price is anticipated to strengthen YoY in 2014, we expect PTTGC's share price to re-rate further, given the strong positive correlation between the stock price and downstream olefins prices (85percent for HDPE, 77percent for LLDPE, and 76percent for LDPE). Note that 60% of the firm's FY13 EBITDA came from its olefins business, while 21% was from its aromatics business, 11percent from the refinery and the remaining 8percent from other operations.

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