PTT Global Chemical

PTT Global Chemical Plc

Investment thesis
We expect 3Q13 earnings to positively surprise the market, while anticipation of a core operational improvement in 4Q13, driven by greater sales volume and fatter product spreads, should push up the share price in the near-term. Moreover, expectations of an olefins margin up-cycle next year will add further weight to the stock. There may also be scope for upside to our earnings forecast from better-than-expected chemical spreads, further capacity expansion and investments in neighboring countries. The stock currently trades at an FY14 PER of 9.2x, a steep discount to the regional mean of 15.6x. Furthermore, its FY14 dividend yield of 4.9% is significantly higher than the Asian average of 3.2%.
Expect 3Q13 earnings to jump YoY but weaken QoQ 
PTTGC should post a 3Q13 net profit of Bt8,894m (down 31% YoY but up 113% QoQ) and core earnings of Bt7,271 (down by 19% YoY and 3% QoQ). The expected YoY contraction is due to: 1) lower olefins product sales volumes (the mean run rate dropped to 75% from 91% in 3Q12, due to an unplanned shutdown at the LDPE plant and lower utilization rates at olefins facilities, due to a shortage of Ethane feedstock from PTT after its GSP#5 stopped operating), 2) slimmer market GRM, 3) a smaller inventory gain, 4) an FX loss (against an FX gain in 3Q12) and 5) a Bt1bn provision for expenses related to an offshore oil pipeline spill.
The key reasons behind the assumed QoQ core earnings contraction are: 1) lower olefins product sales volumes, 2) squeezed aromatics margins and 3) a provision for expenses tied to the offshore pipeline spill. But the 3Q13 bottom-line is expected rise QoQ, driven by an inventory gain of Bt3bn (against an inventory loss booked in 2Q13) and a shallower QoQ FX loss. The refinery’s 3Q13 run rate increased to 98% from 63% in 2Q13, when there was a maintenance shutdown. Meanwhile, market GRM slumped by 55% YoY but rose 13% QoQ to US$2.7/bbl. Accounting GRM is expected to have dived 28% YoY but increased 503% QoQ to $7/bbl in 3Q13.
On the chemical front, PX spread expanded 19% YoY but dipped 5% QoQ to US$511/t, while BZ spread increased 19% YoY but dived 22% QoQ to $321/t. HDPE spread inched up 3% YoY, but softened 3% QoQ to $569/t and LLDPE spread shot up 38% YoY and was flat QoQ at $570/t.
Volume growth & chemical high season to drive 4Q13 earnings  
We expect 4Q13 core earnings to rise both YoY and QoQ, driven by greater sales volumes of olefins products (the LDPE plant has resumed a full capacity run and GSP#5 started operating again in early Oct, albeit at far below its nameplate capacity) and fatter chemical spreads, particularly olefins spreads, in tandem with high seasonal demand. Note also that in 4Q13 there won’t be any further provisioning for expenses tied to the pipeline spill.