PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Although PTTGC’s share price in the next six months could be overhung by low earnings visibility given weaker oil prices, narrow product spreads and the negative impact of gas feedstock repricing, we remain confident about its long-term post-merger fundamentals. We cut our 2012-14 earnings forecasts due to lower product margin assumptions and potential gas feedstock price revisions. This reduces our target price, now based on 6x CY13 EV/EBITDA vs. 7x previously. We downgrade from Outperform to Neutral as the share price overhang could linger until the finalisation of the price revision. 

Downside priced in

We believe the market has over penalised PTTGC due to concerns about downside from the possible repricing of gas feedstock. While we think there will be downside by 1H13 should the actual revision materialise, we believe earnings will only be reduced by 9% starting 2013. Nevertheless, post revisions, we expect PTTGC’s EBITDA margin from gas-based olefins to remain competitive at 18%, higher than the peer average of 13%.

Weaker in short term,stronger in long term

We believe 2Q12 earnings were a weak THB3.6bn, no thanks to inventory losses of THB4bn.Core operating income excluding inventory loss remained robust at THB6bn, driven by solid olefins and aromatics, which would have offset the weak refinery unit. We see a sharp recovery
in earnings in 2H12 on the back of rising volume, improved margins and no inventory losses.

Core earnings and target price

We cut our earnings forecasts by 24% for 2012, 21% for 2013 and 13% for 2014 as we incorporate revised gas feedstock prices starting 2013, lower product spreads and inventory losses.Our target price is also lowered from THB107, based on 7x CY13EV/EBITDA, to THB65, now based
on 6x CY13 EV/EBITDA, on par with the regional peer average given uncertainty over gas repricing and weak margin visibility in the short term. The 26% share price drop in the last 3 months seems excessive, but poor earnings for 2Q on likely large inventory loss and low earnings
visibility in 2H will effectively cap any significant rebound. We expect PTTGC to perform in line with the SET and downgrade the stock to a Neutral from Outperform.