PTT Global Chemical

PTT Global Chemical Plc (PTTGC)
 

Investment thesis: The key messages from the analyst meeting last Friday reaffirmed our optimistic view of PTTGC’s mid- to long-term prospects. We think expectations of a 1Q12 earnings rebound should trigger a stock price increase. Furthermore, synergistic benefits and growth enabled by future investments will make for long-term value creation and share price upside. The stock currently trades at an FY12 PER of 10.0x, its long-term average and a 10% discount to the regional mean.
Strong QoQ earnings recovery in 1Q12: PTTGC’s bottom-line should rebound strongly QoQ in 1Q12, driven by fatter GRM and aromatics spreads, an expected inventory gain and greater sales volumes at PTTCH facilities, as gas supply from PTT has normalized. This volume increase should more than offset the effect of production lost because of 40-day maintenance shutdowns at the Aromatics II and the I4-1 plants. However, YoY earnings growth in 1Q12 is unlikely, as current chemical spreads (especially olefins) are much slimmer than they were in 1Q11.
Chemical spreads to rise gradually through 2012; up-cycle expected in 2013: Fewer industry capacity additions and a demand recovery will drive spread expansion. The HDPE-Naphtha spread is forecast to rise by 2% YoY to US$462/t in 2012 and 20% YoY to $555/t in 2013. The PX spread is projected to expand 7% YoY to $664/t this year, but decline 10% YoY to $595/t in 2013. Management is less bullish on outlook for GRM than it is for chemicals, as refining industry capacity additions are likely to outpace demand growth this year.
Synergistic projects have started bearing fruit: PTTGC said that the “Heavy aromatics” project (expected benefits of US$0.9-2.3m/year) has been completed as planned. The firm is revising some of projects to evaluate the potential incremental benefits (originally expected at $80-154m/year). As such, there may be some delays to the original plan. But substantial benefits should still be recognized in FY13 onward.
Long-term growth drivers: Management also said that the firm is working on a detailed study of several investment projects (both upstream and downstream products). The debottlenecking of the 1mt cracker (which will increase capacity by 20-30%) is likely to be the first priority. Polyethylene plants may also be debottlenecked.