PTT Global Chemical

PTT Global Chemical Plc (PTTGC)
Despite earnings erosion caused by a series of mishaps, most of the investors we met in Malaysia remained positive about PTTGC’s earnings outlook. PTTGC should weather both the fund flow and fundamental storm and re-rate once market confidence returns. We cut our 2013-14 EPS forecasts by 3.8-7% to reflect earnings downside from the shutdown of PTT’s GSP #5 and the LDPE plant and compensation for the oil spill. We maintain our Outperform call but trim our target price to THB93, still based on 8x CY14 EV/EBITDA, the regional peer average. PTTGC remains our top pick with catalysts from volume growth once GSP #5 resumes normal operations by 1Q14.   
What Happened
PTTGC’s management met 12 fund managers in Kuala Lumpur on 19-20 Aug to discuss the implications of the recent oil spill and the GSP #5 shutdown, the 2H13 outlook and the overseas strategic expansion plan. While investors were negative about the near-term earnings outlook due to the oil spill and the GSP#5 shutdown, they were satisfied with PTTGC’s long-term growth outlook focused on expansions in Indonesia and Malaysia and diversification into more high volume specialty (HVS) downstream products.  
What We Think
We believe earnings downside from operational hiccups given the GSP #5 shutdown and oil spill will be limited at 4-7%, including insurance coverage. Growth prospects in 2014-15 are intact, driven by volume recovery and margin expansion due to both rising oil prices (for gas-based olefins) and industry margin recovery (for aromatics and olefins). The long-term growth post 2015 will come from expansion overseas that should drive earnings growth once the industry enters the downcycle by 2016.   
What You Should Do
Buy on weakness. We think PTTGC remains one of the most resilient companies, thanks to its high earnings sustainability given the rising oil prices, which will boost its gas-based olefins business, and the global recovery in petrochemical and refining margins. We believe PTTGC remains an attractive investment choice amid the sell-off, particularly of domestic-driven plays, in the Thai stock market.