PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
In our view, this news strengthens our optimistic view of PTTGC’s long-term growth prospects. Moreover, there is scope for upside to its earnings profile from synergy-building and efficiency improvements, as well as a potential joint investment with Pertamina. We also think there could be a positive surprise to 2Q13 earnings from better olefins spreads than expected. The stock currently trades at an FY13 PER of 9.3x, a steep discount to the regional mean of 15.2x.
Consolidating position as PTT group’s petrochemical flagship
Last Friday, PTTGC’s board approved the purchase of 37,008,000 shares (40% of total share capital) in PTT Phenol Co Ltd (PPCL) from PTT. Note that PTTGC currently holds 60% of PPCL, a firm that manufactures and distributes Phenol, Acetone, and Bis-Phenol A with nameplate capacity of 200kta, 124kta, and 150kta, respectively. PTTGC supplies Propylene and Benzene feedstock to PPCL.
The company expects to sign a share purchase agreement and complete the share transfer by the end of May 2013. Once the transaction is sealed, PTTGC will hold 100% of PPCL.
Acquisition price is reasonable
The cost of the deal will not exceed Bt4,976m including the adjustment for 1Q13 results and the possibility of a deduction for an interim dividend payment by PPCL. In our view, the acquisition price, which implies a PBV of 1x, is reasonable. The source of funds will be internal cash flows. PTTGC will easily finance the deal, given its strong balance sheet—cash on-hand of Bt31bn and a net debt/equity ratio of only 0.4x as of YE12.
Long-term earnings accretion with future growth opportunities  
We expected the move, as PTT is divesting its chemical assets to PTTGC as part of its policy to build the firm’s position as its petrochemical flagship. The outlook for phenol spread during the next few years is unfavorable, due to an influx of new capacity, but phenol spread is forecast to recover in 2016. PTTGC’s purchase of a further 40% stake in PPCL prompted us to revise up our long-term earnings forecast by 2%. As such, our YE13 DCF-derived target price rises to Bt94 from Bt92.
We think this acquisition will support the PTTGC’s migration into high-volume specialty chemicals (such as polycarbonates), one of its key growth strategies. We anticipate further chemical asset sales by PTT to PTTGC. HMC Polymers Co Ltd (a Polypropylene maker in which PTT currently holds 41.44%) would be likely to be the next asset for PTT to sell, in our view.