PTT Global Chemical

PTT Global Chemical Plc (PTTGC)
 

Investment thesis: The key messages from the analyst meeting last Friday reaffirmed our optimistic view toward the firm’s long-term growth outlook. The improved outlook for chemical margins next year together with the prospects for synergistic benefits and growth to be enabled by future investments will make for long-term value creation, we believe. However, in the interim, sharply diminished expectations for 4Q11 earnings may cap the share price performance. As such, we have tactically adopted a near-term negative bias toward the stock.
Synergistic benefits to start kicking in next year: Management reaffirmed that post-merger synergistic projects are lining up as planned. PTTGC will gain several short- to medium-term benefits in the range of US$80-154m per year with the upgrading of existing products, more optimal use of assets and cost savings from sharing tanks and a jetty. Management guided that an immediate gain of $40-50m per year is expected next year; the remaining $40-100m per year of synergies should gradually come into play through FY13-14.
First strategic moves …more to come: PTTGC has set a strategic plan covering both short- and long-term horizons. The first moves have been to: 1) buy 51% of a French firm that makes Isocyanate and 2) acquire a 50% holding in a bio-polymer operation based in the US. The profit contributions from these investments will initially be insignificant compared to PTTGC’s earnings base, but they will set a platform for long-term growth.
Sales volume growth and olefins margin expansion to drive FY12 bottom-line: Management expects all PTTGC facilities to run at close to full capacity next year after major maintenance shutdowns in 2011. In addition, the olefins market should resume an uptrend in 2012, while the aromatics market—particularly the market for PX—looks set to be sustained strong. Note also that GRM next year is forecast to be comparable or only slightly lower than in 2011.
4Q11 profit is likely to be weaker than the market expects: PTTGC’s 4Q11 earnings will probably fall short of recent market expectations, due mainly to slimmer GRM and aromatics margins. Moreover, lower olefins prices will impact on the firm’s margin to some extent, as its pricing formula is linked to product prices.
 

Recommendation and valuation
Maintain BUY with a YE12 target price of Bt82: The improved outlook for chemical margins next year together with the prospects for synergistic benefits and growth to be enabled by future investments will make for long-term value creation. The stock currently trades at an FY12 PER of 9.3x—an 8% discount to the Asian mean of 10x. We, therefore, maintain our fundamental BUY rating with a YE12 DCF-derived target price of Bt82. But in the short-term, we think diminished expectations for 4Q11 earnings may cap the share price performance in the near-term. As such, we have tactically adopted a near-term negative bias toward the stock.