PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis: We think diminished expectations for 4Q11 earnings and concerns about the global economic slowdown may cap PTTGC’s share price performance in the near-term. As such, we have tactically adopted a near-term negative bias toward the stock. However, the improved outlook for chemical margins later this year together with the prospects for synergistic benefits and growth to be enabled by future investments will make for long-term value creation and share price upside. BUY!
Expect a slight earnings contraction for 4Q11: We anticipate that PTTGC will post a 4Q11 net profit of Bt5,460m, by down 17% YoY and 12% QoQ. Stripping out extra items, core profit would be Bt6,103m, up 24% YoY but down 12% QoQ. The drivers of the YoY core earnings growth were: 1) increased sales volume, enabled by PTTCH’s capacity expansion, and 2) fatter aromatics and olefins spreads. The expected QoQ core earnings contraction is attributable to: 1) weaker GRM and 2) slimmer aromatics and olefins spreads (despite higher sales volume).
Profit growth expected in 1Q12: PTTGC’s earnings should rebound QoQ in 1Q12, driven by higher GRM and chemical spreads and greater sales volume from PTTCH’s facilities, as gas supply from PTT has normalized. The average 1Q12 QTD Singapore benchmark GRM has fattened QoQ. Moreover, most chemical spreads have rebounded QoQ, driven by restocking demand. There will be a 40-day maintenance shutdown at the Aro II plant, but volume expansion at PTTCH’s facilities should more than offset the effect of the lost production.
Synergistic projects and future investment plans: The synergistic projects that were initiated following the amalgamation are in-progress and expected to start contributing benefits, as planned, in the months ahead. The company is also working on new investment projects. For the moment, investments will focus on expanding and adding value to PTTGC’s existing olefins and aromatics chains, both vertically and horizontally
Outlook
Expect a slight earnings contraction for 4Q11: Our model indicates that PTTGC will post a 4Q11 net profit of Bt5,460m, down by 17% YoY and 12% QoQ. Stripping out extra items, core profit would be Bt6,103m, up 24% YoY but down 12% QoQ. We also expect the company to report a FY11 net profit of Bt31,286m, up 102% YoY, and a FY11 core profit of Bt30,950m, up 168% YoY.
The drivers of the YoY earnings growth were: 1) increased sales volume, enabled by PTTCH’s capacity expansion, and 2) fatter aromatics and olefins spreads. The factors behind the expected QoQ core earnings contraction were: 1) weaker GRM (led by a sharp drop in gasoline crack spread) and 2) slimmer aromatics and olefins spreads (brought about by a demand slowdown related to the prevailing global economic uncertainty). Note that PTTCH’s sales volume probably rose QoQ, as its facilities had fewer planned shutdowns during the quarter. We also expect the firm to book one-time expenses of about Bt800m in 4Q11 related to the amalgamation.

Olefins chain would have helped support 4Q11 earnings, but … Olefins chain spreads proved to be more resilient than aromatics chain spreads or GRM during 4Q11. With regard to PTTCH, the Ethylene-Ethane spread is expected to post a decline of 8% YoY and a 12% QoQ to $582/tonne, while the Propylene-Ethane spread should report a rise of 2% YoY but a fall of 10% QoQ to $804/tonne. Moreover, the HDPE-Ethane spread is estimated to have strengthened 5% YoY but softened 5% QoQ to $850/tonne, while the LLDPE-Ethane spread is likely to have remained stable YoY but increased 7% QoQ to $883/tonne. In addition, the LDPE-Ethane spread should report a drop of 35% YoY and 30% QoQ to $738/tonne. Moreover, a slimmer QoQ MEG spread (down 14% QoQ to $740/t) would also have contributed to our modeled QoQ earnings contraction.
During the period, the mean utilization rate of PTTCH’s olefins facilities is expected to have increased to 78% from 72% in 3Q11, due to fewer planned shutdowns. Most other production facilities ran at full capacity, except the LDPE plant, which is still in the process of changing its production mode.
It’s worth nothing that under normal circumstances the utilization rate of PTTCH’s facilities should have been higher than our estimate, but PTT supplied about 10% less Ethane volume to PTTGC than usual, due to lower run rates at its Gas Separation Plants the during flooding period (weaker gas demand from electricity generators meant less gas offtaken by PTT, which meant there was less gas available to be passed through GSPs).