PTT Global Chemical

PTT Global Chemical Plc (PTTGC) 

Investment thesis

Though we are more optimistic than before about the Chemical sector’s outlook—as supply tightness has pushed chemical spreads (olefins in particular) to surprising highs—we think that PTTGC’s current share price, which is trading at a YE15 PER of 11.0x, a slight premium to its long-term average of 10.7x—has somewhat priced this in. We would therefore wait for the opportunity to accumulate the stock when chemical spreads soften after the maintenance shutdown season for olefins crackers and the new PX capacities come on line later in 2H15. 

Strong earnings growth expected for 2Q15  

We expect PTTGC to post a net profit of Bt8,904m for 2Q15, up 46% YoY and 58% QoQ. The key factors behind the bottom-line growth were: 1) an absence of extra expense (was booked in 2Q14) and 2) an inventory gain. Stripping out a Bt2.2bn inventory gain, and a Bt1.1bn FX loss, 2Q15 core profit would be Bt7,771m, up 24% YoY and 18% QoQ. 

The key drivers for the assumed core earnings growth were: 1) the YoY greater olefins sales volume (on the heavier Ethane flow from PTT), 2) the fatter olefins spread (YoY and QoQ), 3) the higher PX spread (YoY and QoQ), and 4) the YoY higher market GRM. Note that the EBITDA margin of the olefins business has rebounded to the normal level of 28% in 2Q15 from 25% in 2Q14 and 19% in 1Q15, driven by a greater gas feedstock portion (to 92% in 2Q15 from 89% in 2Q14) and a higher HDPE price (up 16% QoQ to US$1,330/t). We have revised up our FY15 net profit forecast by 3% to Bt27,460m to fine-tune our 2Q15 earnings forecast.  

Planned shutdown and slimmer spreads to taper 3Q15 profit  

We anticipate PTTGC’s 3Q15 core profit to soften both YoY and QoQ, due to lower sales volume (on the back of planned shutdowns of several olefins and aromatics facilities), slimmer chemical spreads and lower market GRM (post spring refinery maintenance season and low seasonality). The HDPE spread has sustained its strength since 2Q15, driven by the maintenance season. However, it is expected to soften going forward as the maintenance season has ended and we are now in a period of low seasonal demand. Despite that, we do not expect to see a sharp contraction in the HDPE spread due to an improved demand-supply balance. Meanwhile, the PX spread is also expected to decline QoQ in 3Q15, due to the start-up of new PX capacities. 

Scope for earnings upside from sustained strong HDPE spread  

The average HDPE-Naphtha spread YTD of US$775/t is surprisingly high—14% higher than the 2014 mean of US$682/t and 41% higher than the five-year average of US$549/t, driven by demand improvement and supply tightness. If it sustains at this elevated level, this would prompt the market to take a more optimistic stance on the HDPE outlook this year and provide scope for an earnings upside.