PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis: We think PTTGC’s recent share price correction has overcompensated for concerns about global economic uncertainty and the likelihood of the cost of Ethane rising. While we fundamentally like the stock, based on a buoyant 2H12 chemical outlook and a strong long-term growth profile, we think that anticipation of a consensus earnings projection down-grade and expectations of weak 2Q12 earnings will cap its price performance in the near-term.
But even with our profit forecast cut, the bottom-line should still expand through FY14, driven by PTTGC’s debottlenecking project. There is also scope for profit upside from greater-than-expected spreads, synergistic benefits and new investments in the future. The stock currently trades at a forward PER of 9.8x—close to 0.5SD below its long-term average of 10.5x a 23% discount to the regional average of 12.7x. In our view, PTTGC should regain momentum once the oil price stabilizes and the Chinese economy shows incipient signs of recovery. Our BUY rating stands with a revised YE12 DCF-derived target price of Bt70.
FY12 forecast cut; street profit downgrade likely:  We have slashed our FY12 net profit projection by 22% to Bt25,559m to factor in the delay to the chemical spread recovery and expectations of weak 2Q12 earnings. A consensus earnings projection downgrade is likely to follow in the near future. However, Morgan Stanley believes that the global economy will gradually recover in 2H12, which should boost spreads.
Potential impact of likely Ethane price rise: There is no clear benchmark price for Ethane, but it will probably increase to take account of the fact that PTT’s pooled gas price has risen about 25% since August 2008. In the absence of a clear benchmark, we assume that the price of Ethane will jump by 25%, effective FY13-16, then rise by around 5% once every four years thereafter (which takes into account higher investment costs for E&P firms and assumes a gently rising long-term crude price). As such, we have cut our PTTGC FY13-21 earnings forecasts by an average of 13% from our previous projections.
Outlook
Demand recovery delay and concerns over gas price adjustment priced in: PTTGC’s share price has dropped by 26% during the past four months, underperforming the SET by 22% and the Petrochemical sector by 2% YTD, due to concerns over the fact that demand has so far failed to recover, the likelihood that the cost of Ethane will rise and expectations of weak 2Q12 earnings (as a result of an inventory loss caused by the recent plunge in crude prices).