PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
Apart from expectations of a demand recovery in 2H13 and scope for upside to PTTGC’s earnings from synergistic benefits and efficiency improvement projects, a potential joint investment with Pertamina would boost its long-term growth profile. The stock currently trades at an FY13 PER of 9.0x and an EV/EBITDA of 5.6x, steep discounts to the regional means of 14.3x and 11.5x, respectively.  
Another step forward to a joint investment with Pertamina 
The Indonesian state-owned energy firm PT Pertamina issued a news release yesterday saying that it had signed a Heads of Agreement (HOA) with PTTGC to build a “world class” petrochemical complex in Indonesia. The HOA defined the collaboration framework between the two parties to undertake detailed feasibility studies for future business development plans and to establish a joint-venture company.
The joint-venture company should be registered this year to start engineering and construction work. PTTGC guides that the preliminary shareholding structure of the JV will be 51% Pertamina and 49% PTTGC. But a third partner would be conceivable, if it could contribute meaningfully to the project.                
JV to boost PTTGC’s long-term growth profile
The planned petrochemical complex would comprise an olefins plant (a Naphtha cracker using feedstock from Pertamina refineries with a capacity of not less than 1mt/year) and downstream polymers facilities. The investment cost is estimated at US$4-5bn and funding is expected to be project financing. Commercial operations are targeted to commence no later than 2018. As it will be a Naphtha cracker, we assume that the products would comprise Ethylene, Propylene, Polyethylene, and Polypropylene. We would also expect some of the output to be specialty products.
In our view, the joint-venture would boost PTTGC’s long-term growth profile, as Indonesia is—by far—the biggest market in ASEAN. We preliminarily estimate that the proposed JV would increase PTTGC’s earnings by 30% from our current long-term projection.            
Substantial financial capacity to invest
PTTGC has the financial capacity to invest in projects totaling US$4.5bn (internal cash flows of US$2.5bn and debt of $2bn) during FY13-17. Assuming that it will hold a 49% stake in the project, its share of the investment cost would be in the region of $2-2.5bn (far below its capacity) with a net interest-bearing debt/equity ratio of 0.3-0.5x, still much lower than its treasury policy of not more than 0.7x.