PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
In our view, this news strengthens our bullish 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. Renewed concerns about the Chinese economic slowdown may weigh on sentiment toward the stock in the short-term, but we expect the share price to regain momentum when there are signs of better times ahead. PTTGC currently trades at an FY13 PER of 8.7x—a steep discount to the regional mean of 13.6x—with a FY13 dividend yield of 5.2%, much higher than the Asian average of 3.4%.
Another move to accomplish 1-Step Adjacencies strategy
Yesterday, PTTGC announced that PTT Phenol Co Ltd (PPCL), its 100%-owned subsidiary, will invest in a Phenol 2 project with capacity to produce 250kta of Phenol and 155kta of Acetone. The investment cost will be US$348m (about Bt10,450m). The plant is expected to start operating in 3Q15, boosting the firm’s Phenol and Acetone production capacity by 125% to 450kta and 279kta, respectively. PTTGC will supply BZ (220kta) and Propylene (119kta) as the main feedstocks. This move will fulfill its “1-Step Adjacencies” strategy to enter the high-volume specialties business.
Further downstream integration through the value chain
The Phenol 2 plant will not only contribute to volume growth but also to margin expansion, as it will mean integrated margin for the entire value chain by adding value to the firm’s BZ and Propylene output. Moreover, the facility will enable PTTGC to integrate further downstream into Phenol derivatives, such as Adipic Acid, Polycarbonate, Nylon, etc, which require Phenol as a feedstock.
The firm can easily finance Phenol 2
Project funding will comprise equity of Bt3.5bn and a long-term loan of Bt7bn. PTTGC should easily finance the deal, given its strong balance sheet—cash on-hand of Bt21bn and a net debt/equity ratio of only 0.39x as of end-March 2013. We expect the firm’s net debt/equity ratio to rise slightly to 0.41x as a result of the debt financing for the plant.
Long-term earnings enhancer
Even though the outlook for Phenol spread during the next few years is unfavorable, due to an influx of new capacity, spread is forecast to recover in 2016. The investment in the Phenol 2 project prompted us to revise up our long-term earnings forecast by 5%. As such, our YE13 DCF-derived target price rises to Bt98 from Bt94.