PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

BUY maintained with upside surprise expected in 4Q13F. The strong earnings recovery in 3Q13, though backed by a stock gain, proves that PTTGC is resilient, coming back after three unfortunate incidents that are expected to dampen 2013 earnings by nearly 10%. This is partly due to its “excellence” programs that have raised EBITDA by US$149.4mn in 9M13 or 84% of its full-year target of US$177mn. There may be surprise upside to our projection for 2013F as we expect earnings to continue to improve QoQ in 4Q13F. We reaffirm our BUY with mid-2014 TP of Bt92/share.
Gas supply disruption eased. Management said that since GSP#5 came back to run at 50% in late October, it has been able to bump up its olefins plants utilization to 90% in 4Q13 from only 75% in 3Q13. It expects to reach 100% by April 2014, although GSP#5 will not return to normal operations until August 2014. We expect this to be a key earnings driver in 4Q13.
Debottlenecking projects underway. Over 2013-16F PTTGC is engaging in at least five investment projects to enhance production efficiency and improve yield. This includes the debottlenecking of PTTPE ethane cracker which will raise the plant’s capacity by 12% or 120ktpa. Since ethane gas supply from PTT is limited at only 60% of total requirement, it uses LPG for the remainder. PTTGC plans to swap the additional LPG feedstock with ethane feedstock of I4-1. This means the net increase to overall ethylene capacity will be only 80-90ktpa since LPG yields a lower ethylene ratio. Project investment is estimated at US$285mn with expected IRR of 17%. The plant is scheduled to commence operations by 2016.
Finalizing strategic investment with Pertamina. Management reaffirmed the joint investment with Indonesia’s Pertamina with the JV agreement to be signed on Dec 10. The two parties have jointly appointed financial and technical advisors with the detailed feasibility studies to be finalized soon. This project will be a world-scale integrated petrochemical complex covering upstream to downstream with total investment of US$4-5bn. Commercial startup is expected in 2018. This project is an important step into a market with high potential such as Indonesia.   
Earnings to continue to improve in 4Q13F. The key drivers for 4Q13F are higher operating rates of its olefins and derivative products after the LDPE plant resumed normal operations in late September and PTT’s GSP#5 is able to supply more feedstock at a 50% production rate in late October. More favorable GRM, driven mainly by middle distillates products in 4Q13 due to seasonal demand, will continue to boost PTTGC’s margin. Product spread for olefins products is expected to be sustained at current levels despite slowing market activity in the last quarter. Key concerns remain focused on aromatics spread due to market anxiety on new supply and potential stock loss if oil price continues to decline from current levels.