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PTT Global Chemical

Riding an olefins up-cycle

PTT Global Chemical Plc (PTTGC)

Investment thesis

The key messages at the analyst meeting reaffirmed our optimistic view of PTTGC's growth prospects. We expect QoQ earnings growth throughout this year, led by an olefins market uptrend and a strong GRM outlook, which should catalyze the share price going forward. PTTGC's current valuation is undemanding—an FY14 PER of 9.6x, 0.4SD below its long-term mean of 10x and a steep discount to the regional average of 18.5x. Furthermore, its expected dividend yield for FY14 of 4.7% is significantly higher than the Asian mean of 2.9%.

Greater volume to drive 2Q14 core profit growth

PTTGC's 2Q14 core earnings are expected to post strong YoY and QoQ growth, fueled by greater sales volume and strong GRM and olefins spreads. Olefins sales volume should rise 17% QoQ, driven by fewer shutdowns and more gas feedstock from PTT's GSP#5. The firm guides that the mean run rate of its olefins plants will increase to 94% in 2Q14 from 77% in 1Q14. Note that the HDPE-Naphtha spread in 2Q14-to-date is up by 9% YoY and 3% QoQ to US$640/t. Meanwhile, the QTD Singapore benchmark GRM is $6.3/bbl, stable QoQ. In contrast, the QTD PX spread has tumbled by 63% YoY and 26% QoQ to $238/t.

An olefins up-cycle has started & more optimistic on GRM this year

An olefins up-cycle has started, brought about by demand growth in the face of fewer capacity additions. The HDPE-Naphtha spread is forecast to rise 10% YoY to US$625/t in 2014. The average YTD HDPE price has risen 4% YoY to $1,550/t, while the HDPE spread has increased 11% YoY to $630/t. Moreover, the prospects for GRM have shifted to be more favorable. The 2014 benchmark GRM is now forecast to rise to $7.1/bbl from $6.7/bbl last year (against a flat outlook earlier), led by refinery closures and delays to the start-ups of new plants.

Aromatics market heading south

In contrast, the aromatics market has entered a downturn, due to an influx of new capacity. But the current PX-Naphtha spread of US$245/t is very close to the cash costs of high-cost producers ($250/t), so downside risk should be limited. Also, the strong Benzene-Naphtha spread of $330/t (against a historical average of $200/t) mitigates the effect of the PX spread slump.

Promising long-term growth prospects

PTTGC's FY14 incremental EBITDA target of US$237m—to be yielded from synergies and investment projects—stands, as synergy-building efforts and projects are mostly progressing as planned. Other debottlenecking and expansion projects (EO expansion, Phenol 2, PX expansion, PTTPE cracker debottlenecking and LLDPE expansion) are also moving forward. These projects will start operating, 3Q15-2017.

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