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PTT Global Chemical

Trough quarter is now behind us, brighter quarter ahead

PTT Global Chemical Plc (PTTGC)

Investment thesis

The market has already priced in concerns over the possible impact of soon-to-be-announced energy policy reform, we believe. Based on our expectations for energy reform (see our June 27 report), our rejigged FY14 EPS forecast of Bt6.77 implies a PER of 10x (roughly PTTGC's long-term average). Moreover, QoQ earnings growth in 3Q14 should boost the share price going forward. The current valuation is undemanding—an FY14 PER of 9.2x, a steep discount to the regional average of 19.6x. Furthermore, its dividend yield for FY14 of 4.9% is far above the Asian mean of 2.9%.

Expect 2Q14 earnings to be the trough for this year

PTTGC is expected to post a net profit of Bt6,137m for 2Q14, up 47% YoY but down 3% QoQ. Gains on inventory, oil hedging and FX (against losses on inventory, oil hedging and FX in 2Q13) were the drivers of the assumed YoY earnings growth. Stripping out an expected Bt1,250m asset impairment tied to the business restructuring of Vencorex Holding (France; 51% equity stake), a Bt900m inventory gain, a Bt431m gain on oil hedging and a Bt29m FX gain, 2Q14 core earnings would be expected at Bt6,026m, down by 20% YoY and 11% QoQ. The key factors behind the core profit contraction were: 1) lower aromatics margins, 2) a higher blended gas feedstock cost and 3) a slimmer MEG spread.

As Ethane supply from PTT's GSP#5 didn't flow smoothly during the quarter, PTTGC had to use a 5% greater proportion of NGLs from other sources (which cost ~30-40% more than PTT's Ethane price). So, the EBITDA margin of the olefins business is expected to have declined to 25% in 2Q14 from 28% in 2Q13. However, it should have risen from the 24% posted for 1Q14, due to less use of Naphtha (to 11percent from 14% in 1Q14). In any case, a greater crude run, increased sales volumes of olefins and polymers products and a firm market GRM would have mitigated the core earnings decline.

Strong earnings growth expected for 3Q14

We expect PTTGC's 3Q14 core earnings to expand both YoY and QoQ, driven by greater sales volume and seasonally fatter chemical spreads. While the run rates of the refinery and aromatics plants are expected to be sustained high QoQ, the utilization rates of the olefins and polymers plants should rise both YoY and QoQ, due to fewer planned shutdowns and the shipping of orders that were postponed.

The HDPE spread in 3Q14-to-date is up by 11% YoY and 2% QoQ to US$629/t. In contrast, the PX spread has fallen 14% YoY but increased 43% QoQ to $479/t during the period. However, the current strong PX spread is unlikely to be sustained, as 3.5mt of new PX capacity (equal to ~10% of Asian capacity) is slated to start operating in 2H14.




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