PTT Global Chemical

Investment thesis

Even though PTTGC’s long-term growth prospects remain good, the unfavorable product spread outlook brought about by the prevailing global economic uncertainty prompted us to adopt a tactically negative bias toward the stock for the near-term. However, anticipation of strong 3Q12 earnings should help support the share price. In addition, if there were incipient signs of a sustainable recovery in the global economy—China in particular—we would expect spreads to rally and the share price to re-rate. PTTGC currently trades at an FY13 PER of 8.7x and a YE13 PBV of 1.1x —1SD below its long-term averages and discounts to the regional means.   

3Q12 bottom-line to boost from inventory gain, and …

PTTGC’s 3Q12 bottom-line is expected to bounce both YoY and QoQ, driven by inventory gains and a reversal of LCM. We have revisited our 3Q12 profit model and believe the firm’s 3Q12 numbers will be better than we previously envisaged. We now expect PTTGC to post a strong 3Q12 net profit of Bt10,577m, up by 70% YoY and 1,142% QoQ. We assume an inventory gain (including a reversal of LCM) of US$5/bbl, against an inventory gain of $0.18/bbl in 3Q11 and an inventory loss (including LCM) of $8.8/bbl in 2Q12.    

…core profit expansion is also expected

Stripping out extra items, we model for a 3Q12 core profit of Bt7,397m, up by 6% YoY and 4% QoQ. The key drivers were: 1) a fatter market GRM (US$6.5/bbl versus $5.0/bbl in 3Q11 and $4.3/bbl in 2Q12), 2) a higher BZ spread ($264/t, up 60% YoY and 49% QoQ), 3) Ethylene spread expansion ($285/t, up 28% YoY and 13% QoQ) and 4) greater sales volume (up by 20% YoY and 5% QoQ).   

4Q12 core earnings to rise YoY, but soften QoQ 

PTTGC’s core profit is expected to rise YoY in 4Q12, driven by a fatter GRM and greater sales volume brought about by increased utilization rates at its olefins facilities (with more Ethane feedstock supplied by PTT). However, in QoQ terms, core profitability will probably decline, due to: 1) a weaker GRM (with new capacity additions and the re-starts of refineries with the end of maintenance shutdown season) and 2) slimmer product spreads over Ethane (the price PTTGC pays for Ethane rose about US$40/tonne, effective August 1, 2012). Nonetheless, fatter aromatics margins should mitigate QoQ earnings downside. It’s worth noting that a weakening crude price could result in an inventory loss, which would squeeze the firm’s 4Q12 bottom-line.