PTTGC reported a 2Q14 net profit of Bt6,085m, up 46% YoY but down 3% QoQ. Stripping out a Bt1,142m provision for the business restructuring of Vencorex Holding (France; 51% equity stake), a Bt1,180m inventory gain, a Bt411m gain on oil hedging, a Bt484m gain on derivatives and a Bt2m FX loss, core earnings would be Bt6,251m, down by 16% YoY and 7% QoQ. The result was in line with our estimate and the consensus.
Gains on inventory, oil hedging and derivatives drove the YoY bottom-line growth. The key factors behind the core profit contraction were: 1) slimmer aromatics margins, 2) a higher blended gas feedstock cost and 3) a squeezed MEG spread. As Ethane supply from PTT’s GSP#5 didn’t flow smoothly in 2Q14, PTTGC had to use a 5% greater proportion of NGLs sourced from elsewhere (which cost more). So, the EBITDA margin of the olefins business declined to 25% in 2Q14 from 28% in 2Q13. However, it rose from 24% in 1Q14, due to less use of Naphtha (to 11% from 14% in 1Q14). Note that a greater crude run, increased sales volumes of chemical products and a firm market GRM mitigated the core profit decline (Figure 2).
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 had been postponed. The HDPE spread in 3Q14-to-date is up by 17% YoY and 7% QoQ to US$661/t. In contrast, the PX spread has fallen 15% YoY (but increased 46% QoQ) to $489/t during the period. Note that the current strong PX spread is unlikely to be sustained, as 3.5mt of new PX capacity is slated to start operating in 2H14.
We have cut our FY14 net profit forecast 14% to Bt28,169m to reflect: 1) a lower EBITDA margin assumption for the olefins business (to 26% from 27.5% previously) and 2) a provision for business restructuring booked in 2Q14. Our revised DCF-derived target price is now Bt83 (down from Bt85).
The market has already priced in the weak 2Q14 earnings and concerns over the possible impact of soon-to-be-announced energy policy reform, we believe. Moreover, QoQ earnings growth in 3Q14 should boost the share price going forward. The current valuation is undemanding—an FY14 PER of 10.5x, a steep discount to the regional average of 19.9x. Furthermore, PTTGC’s dividend yield for FY14 is 4.3%, far above the Asian mean of 2.8%.