PTT Chemical

PTT Chemical Plc (PTTCH)

What’s new? On September 30, The National Energy Policy Council (NEPC) decided that the petrochemical industry will be required to contribute to the Oil Fund when it purchases liquefied petroleum gas (LPG). The levy will be Bt1/kilogram, effective January 1, 2012.
Comment: As PTTCH uses LPG as feedstock (about 20% of total feedstock consumption, or 688kta), the firm is likely to have to contribute to the Oil Fund at the aforementioned rate. However, it is not yet clear whether or not it will be subject to the levy for existing LPG contracts with PTT. In addition, we don’t yet know how long the petrochemical operators that use LPG will have to pay contributions to the Oil Fund.
Under our worst-case scenario—PTTCH has to contribute to the Oil Fund for all its purchases of LPG, starting January 1, 2012—the company’s feedstock cost would increase by around Bt688m annually. Thus its long-term earnings profile would decline by 2.5% per year from our current projections, in which case our DCF-derived YE12 target price would fall Bt4 from our current target of Bt168.
Action: We think that this news may negatively impact on sentiment toward the stock, but the effect on earnings will be minimal. Note also that the expected earnings trough in 3Q11 and concerns about the global economic slowdown may dampen investor interest in PTTCH and cap its share price performance in the near-term. However, we think the stock will regain momentum once the global economy is back on-track. We still like PTTCH for the MergedCo theme and the approaching industry up-cycle. Valuation-wise, the stock currently trades at a YE12 PBV of 1.1x—a 26% discount to the regional average of 1.5x—and a YE12 PER of 6.5x—a 24% discount to the Asian mean of 8.6x.