PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

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 will cap the share price performance in the near-term. However, the firm’s street-beating 3Q12 earnings should support its stock price. In addition, if there were signs of a recovery in the global economy—China in particular—we would expect spreads to rally and the share to re-rate. PTTGC currently trades at an FY13 PER of 9.2x (0.5SD below its long-term average) and a YE13 PBV of 1.1x (down 1SD), discounts to the regional means.   

Above estimates
PTTGC reported a strong 3Q12 net profit of Bt12,910m, up by 114% YoY and 1,416% QoQ. Stripping out extra items, 3Q12 core profit would be Bt8,949m, up by 45% YoY and 18% QoQ. The result was 22% above our forecast, due to higher-than-expected sales volume, a bigger inventory gain than modeled and a lower effective tax rate than assumed.

Results highlights
The 3Q12 bottom-line surge was driven by inventory gains and a reversal of LCM. The inventory gain (including reversal of LCM) was US$3.7/bbl (Bt3,275m) against an inventory gain of $0.18/bbl (Bt81m) in 3Q11 and an inventory loss (including LCM) of $8.8/bbl (Bt6,187m) in 2Q12. The key core profit drivers were: 1) a fatter market GRM ($5.9/bbl versus $5.0/bbl in 3Q11 and $4.3/bbl in 2Q12), 2) a fatter BZ spread ($263/t, up by 43% YoY and 48% QoQ), 3) Ethylene spread expansion ($285/t, up by 28% YoY and 13% QoQ) and 4) a sales volume rise of 14% YoY and 9% QoQ. The refinery and the aromatics plants operated at full capacity and the mean run rate of the Polyethylene facilities increased to 102% in 3Q12 from 76% in 3Q11 and 94% in 2Q12.

Outlook
PTTGC’s core profit is expected to rise YoY in 4Q12, driven by a fatter GRM and greater sales volume brought about by higher run rates at its olefins facilities (with more Ethane feedstock supplied by PTT). But 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 could make for upside to 4Q12 core profit.

What’s changed?
Even though the 9M12 net profit of Bt23,613m represents 80% of our FY12 forecast, we maintain it unchanged, as we expect 4Q12 earnings to soften QoQ for the reasons noted above.