PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
The unplanned shutdown of PTT’s fifth GSP will negatively impact PTTGC’s earnings, but we think the market has already priced that in with the 5% stock price decline during the last few trading days. In any case, the scale of the loss can be mitigated through stop-gap measures. Also, if the absence of 151kt of olefins production were to trigger a spike in olefins prices, the loss for PTTGC would ease. Valuation-wise, the stock currently trades at an FY13 PER of 10.3x, a deep discount to the regional mean of 21x.
Olefins production loss from GSP#5 outage 
PTTGC uses Ethane (525kta) and LPG (44kta) from PTT’s GSP#5 as feedstock for its I4-2 plant, which has an Ethylene production capacity of 400ktpa (17% of PTTGC’s total Ethylene capacity) and Propylene production capacity of 50ktpa (10% of PTTGC’s Propylene capacity). Under the worst-case scenario where GSP#5 is down for five months, we would roughly estimate the production loss at 151kt (5% of its total annualized olefins capacity). See our August 16 report for details. 
Expect only slight impact on FY13 earnings 
Management will implement measures to mitigate the scale of the loss, including reallocating Ethane from other olefins plants, replacing the LPG shortfall from GSP#5 with its own LPG (produced by its refinery and aromatics plants), and increasing the use of Naphtha as a feedstock. The I4-2 plant will still be able to operate, albeit at a reduced rate of 75-80% of capacity, and the overall operating rate of the olefins crackers will decline to 85% from a normal operating rate of 95% for 3-5 months. Taking into account the olefins production loss of 151kt, we estimate that PTTGC’s FY13 earnings would be squeezed by Bt2bn.
We have, therefore, revised down both our FY13 core profit and net profit forecasts by 6% to Bt30,717m and Bt33,982m, respectively. We think that the actual impact on earnings is likely to be less than our estimate, as PTTGC is covered by business interruption (BI) insurance. The maximum amount claimable under its BI policy, which includes a suppliers extension clause, is US$5m. Assuming that the firm is eligible to claim US$5m, we would expect the insurance payout to be booked next year. As such, we have revised up our FY14 earnings forecast by 0.3% to Bt37,498m. Our YE13 DCF-derived target price is trimmed to Bt91 from Bt92.
Additional mitigation approaches would further ease impact  
PTTGC is considering other approaches to ease the impact of the Ethane shortage. For example, it might import Ethylene from outside to feed its polyethylene plants, if the HDPE-Ethylene spread exceeds US$180/t.