PTT Exploration & Production

PTT Exploration & Production Plc (PTTEP)   

With the final pricing for the additional 650m shares to be issued determined at THB142, we believe the overhang from the capital increase is now removed. The stock should, over time, start to reflect PTTEP’s solid earnings outlook as the valuation discount narrows. We reiterate our positive view on PTTEP on the back of a potential valuation rerating, better earnings outlook, and more attractive valuation. We raise our DCF-based (WACC 11%) target price to THB190 by lowering our risk premium for PTTEP by 50bp to reflect the removal of the capital increase overhang. We upgrade our call from Trading Buy to Outperform

What Happened
PTTEP finally announced the pricing for its 650m additional shares to be issued, at the ratio of 0.195783 new shares for every one existing share, at THB142, which is at the higher end of the price range of THB135-145. This price will be applied for all shares subscribed during 3-6 Dec and the shares will be listed on 14 Dec (if fully subscribed in the first round) or 19 Dec (if second round is needed). At this price PTTEP will be raising THB92bn or US$3bn, a slight US$184 mn shortfall from its original target of THB98bn or US$3.2bn.

What We Think
The final price for the additional shares is at the upper end of the price range. This price reflects 8.5x CY13 P/E and 8.0x CY14 P/E, the historical low valuation for PTTEP. Given that the pricing risk for PTTEP is now removed, its share price should start reflecting the company’s solid earnings
growth outlook in 2013-14. The shortfall for from the capital increase of US$184m should not be a concern as PTTEP will require only US$2.2bn cash for the acquisition of COVE Energy.

What You Should Do
Buy ahead of the share price rerating. We believe PTTEP’s share price will start to outperform over the next 12 months given its projected strong earnings growth of 16% for 2013. The current valuation is attractive at 8.5x CY13 P/E, the historical low average for PTTEP, which we think is not justified given its solid fundamentals following the removal of the overhang from the capital increase.