PTT Plc

Eyes on energy price liberalisation

PTT Plc

Investment thesis

At the group analyst meeting last Friday, management talked about LPG and NGV price de-control, renewing our optimism over the possibility of price adjustments after the cooking gas price cap expires at end-March. Despite political resistance to raising prices, we think the risk-reward proposition at PTT's current share price has improved, so offers a trading opportunity on the de-control story. PTT's price performance is far behind the SET—its PER has historically been a 20% discount to the main index, it is currently a 36% discount.

What if the cooking gas price is liberalised?

PTT has been lost money on LPG sales since 2Q12 and posted a deep loss on LPG sales in 4Q12 when the cost of gas spiked to US$390/t against an ex-GSP LPG price cap of $330/t. Assuming that PTT's FY13 gas cost is similar to the current level, we calculate a Bt4bn loss on LPG sales. The floatation of the cooking gas price would clearly boost its earnings, as it would lift the ex-GSP LPG price. We understand that the govt plans to increase the cooking gas price by Bt0.50/month over 12 months from the current cap of Bt18/kg, so the ex-GSP price would rise by $15/t a month.

If the policy is implemented, it would boost our PTT profit forecast by Bt1.5bn/year. The govt will consider its cooking gas price regime again before the price cap is due to expire at end-March.

Will NGV price de-control follow suit?

Once the new LPG price regime is effectively implemented, the govt also aims to resume its NGV price adjustment program, which was put on hold in April last year. The govt earlier asked PTT to ensure sufficient NGV supply to motorists. PTT said it procured an extra 15-20% of NGV to 9,000 tonnes/day from 7,700t/day in FY11. With the govt's price regime initiated by late 2011, the price will rise by Bt0.50/kg/month to a max of Bt14.50/kg from the current cap of Bt10.50/kg. We calculate every Bt0.50 increase would boost our PTT profit forecast by Bt1.1bn/year. Nonetheless, we doubt that the firm would break-even on NGV sales (at best, shallower losses) if the govt were to continue subsidizing prices for taxi drivers.

Regional power expansion—the main engine of long-term growth?

The revised Power Development Plan may reduce Thailand's gas demand over the long-term, as the govt aims to shift away from gas-fired to coal-fired and hydropower plants. However, management believes that new gas-fired power plants will still needed, so gas demand will grow, just at a slower pace. The firm will move into power generation—it established a new power flagship recently. It aims to operate in ASEAN—Myanmar, Laos, the Philippines, Vietnam and Indonesia—countries whose economies are expanding, some of which are subject to power shortages. However, the plan is still in feasibility study mode.