PTT

PTT Plc

 

Investment thesis

While a year-long decline in the oil price (amid the lagging gas price adjustment) has squeezed PTT’s 2015 profitability (particularly reaching its worst in 4Q15), we believe 2016 will return to a norm. A greater scale of gas cost decline (than it saw in 2015) will make 2016 earnings more resilient amid a deeper-and-longer oil price downturn. That would prompt for a further rerating, albeit on a 17% spike in the share price over the past two weeks, we believe. The current valuation is at a historical low (-2 SD) and also an 11.9% discount to its subsidiaries’ share prices (versus five-year average of 8.5%), based on our PTT’s sum-of-the-parts model. Based on our recent earnings cut, we trimmed our DCF-based TP to Bt292 from Bt309, also implying a 1.2x P/BV (pegged at –1 SD).   

4Q15 saw weakest operation for the year …

Despite a forecast bottom-line bounce in 4Q15, we are pessimistic about its operational outlook. Without impairment on coal assets, we still anticipate below-par NPAT of Bt14.6bn. The core number will also be the worst; we modeled only Bt10.9bn (down 59% QoQ, 33% YoY). Its core gas business’ performance will be disappointing—the gas margin will decline due to a downward adjustment in well-head gas prices in Oct and seasonally low demand for gas. There will be a plus with deeper losses on gas sales to industrial clients (~14% of total gas sales)—the adjustment in its gas costs typically slows to respond to a change in market selling prices, which fell sharply in tandem with oil prices. Moreover, the GSP business will weaken on a seasonal soft-patch in petchem margins. 

… but impairment loss could be last one-off effect

PTT conveyed the likelihood of impairment loss on the deteriorating value of its coal assets, but it has yet to quantify the scale of the charge. We marked to market our coal price forecast to the revised Japanese Benchmark Price, which is due to be released in Apr  (and will likely go lower to US$55/t from US$62/t), and factored in cost reduction program (which fell by 30%, post acquisition),  We feel that the impairment charge of Bt10-20bn (or ~20-40% of total investment costs) seemed to make sense under the prevailing low coal price situation. If it were to continue to be the case, the 4Q15 bottom-line would fall in range of Bt-5.3bn to Bt4.6bn.     

2016 set to improve—decline in gas costs more imminent    

Though we cut our FY16-17 NPAT estimates 12% and 27%, pegged with downwardly revised oil price forecasts (US$42/bbl for 2016 and US$48/bbl for 2017), we hold the optimistic view that 4Q15 was a setback and 2016 is set to improve. Furrowed brows exist as the collapse in the oil price has dented 2015 profitability due to a lagging adjustment to its gas costs—oil prices have fallen 65%, while gas prices dropped only 23% over the past year. Yet, we believe a cost-down mechanism has is more likely in 2016, and will perhaps counterbalance the effect of the oil price.   

What could be the downside?   

Meaningful gas cost adjustment will buoy margins from a netback pricing formula with PTTGC, and ease loss on NGV sales; we estimate Bt4bn versus 2015’s Bt10bn. Its oil unit is also a “margin-plus-volume” business, which remains healthy amid low oil prices. On our model, its core gas & oil performance will increasingly weigh on the outlook, accounting for 54% of total (versus 30% historically) with the refining & chemical units almost making the balance. As such, we shun thinking that 2016 earnings would be more resilient than they were in 2015, albeit on a deeper-and-longer oil price downturn scenario—our sensitivity analysis indicated that every US$5/bbl decline in price will have the moderate impact of Bt5bn/year