BUY maintained as weakness is past. We believe profit hit bottom in 1Q14, as a result of a maintenance shutdown and a sharp fall in PX price and spread. We expect performance to improve in 2Q14 with higher utilization and lower unit cost from economies of scale. We see limited downside risk for PX since current levels are already below cash cost. We maintain our BUY rating on an undemanding valuation of 2014 PE at 9x vs. 20x for regional peers.
Higher utilization to boost earnings. After several maintenance shutdowns in 1Q14 PTTGC will not have another major shutdown until 4Q14 when its aromatics plant (AR2) will be shut for maintenance. Management expects full-year utilization of olefins crackers to surge to 94% from only 77% in 1Q14. This is consistent with a higher utilization rate of PTT's gas separation plant #5 (GSP5), which reached 100% utilization in late March. The company plans to reduce the operating rate of the olefins cracker again in August due to a planned shutdown of GSP5 to install permanent equipment which was affected by the incident in 3Q13.
More benefits from synergy projects to be recognized. In addition we expect earnings for the remaining quarters to be lifted by synergy, as management says synergy benefits in 1Q14 still fell short of target. It says synergy benefits will improve EBITDA by US$83mn in 2014 but only US$6.5mn was recorded in 1Q14 due to the plant shutdown. The marketing and operational excellence programs will boost EBITDA by US$26.8mn, still on track to meet the targeted US$111mn in 2014. It expects more EBITDA improvement from several de-bottlenecking and expansion projects over the next five years with total investment of US$1.4bn and average payback period of ~5 years based on the expected EBITDA improvement of ~US$260mn p.a.
PX to remain in the doldrums but downside limited. The sharp decline of PX price in 1Q14 was the primary factor in the reduction in earnings. Based on industry consultants, the current price of US$1,200/t is already below cash cost of regional producers. This implies that more production cuts can be expected. PX price and spread will remain low until 2016 due to demand/supply imbalance.
More positive outlook for refining margin and olefins. PTTGC has become more positive on market GRM due to a potential delay of new refining capacities in China. This implies that the favorable GRM can be maintained until 2017. PTTGC’s refinery will be operating full out this year and next after a major shutdown in 1Q13. Outlook for olefins also remains strong on firm demand in Asia and limited new supply.
Compounding strategy to improve EBITDA margin. PTTGC has adopted a new strategy to lift its EBITDA margin in the longer term with marginal investment, by developing more compound products. This will add value to its commodity grade products by compounding processes and support its strategy to increase the proportion of high-volume specialties in its product portfolio. The EBITDA margin for compound products is expected at 8-30% compared with 5-15% for commodity grade polymer products.