PTT Global Chemical

PTT Global Chemical Plc (PTTGC)
 

In line with estimate: PTTGC posted a 1Q12 net profit of Bt9,852m, down 12% YoY but up 143% QoQ. Stripping out extraordinary items, 1Q12 core profit would be Bt6,361m, down 23% YoY but up 67% QoQ. The result was in line with our estimate and the consensus.
Results highlights: The key factors behind the YoY earnings contraction were: 1) weaker GRM (market GRM dropped 29% YoY to $5.77/bbl; accounting GRM fell 24% YoY to $9.65/bbl), 2) slimmer aromatics and olefins spreads and 3) a lower inventory gain ($3.71/bbl against $6.29/bbl in 1Q11). The drivers of the QoQ profit growth were: 1) greater sales volume at PTTCH facilities (to 86% from 84% in 1Q11 and 78% in 4Q11), 2) a fatter GRM (market GRM rose 3% QoQ; accounting GRM surged 76%), 3) higher aromatics and olefins margins and 4) a bigger inventory gain ($3.71/bbl; it was $0.27/bbl in 4Q11).
The Ethylene-Ethane spread rose by 1% YoY and 29% QoQ to US$753/tonne, while the HDPE-Ethane spread strengthened by 2% YoY and 5% QoQ to $897/tonne. The LLDPE-Ethane spread weakened 13% YoY but increased 9% QoQ to $807/tonne, while the MEG spread fell by 5% YoY and 35% QoQ to $449/t. Meanwhile, the PX spread dropped by 28% YoY and 2% QoQ to US$556/tonne. However, the BZ surged by 108% QoQ (but dropped 39% YoY) to $175/tonne.
Outlook: As oil prices are now on a downtrend, PTTGC’s 2Q12 earnings are expected to drop QoQ—the 1Q12 inventory gain will almost certainly reverse into a loss. However, expected increases in sales volumes from both PTTAR’s and PTTCH’s facilities should mitigate the negative impact on core earnings resulting from weak 2Q12 chemical spreads.
What’s changed? Although 1Q12 net profit accounted for 30% of our FY12 forecast of Bt32,870m, we maintain our projection unchanged, as 2Q12 earnings are expected to weaken QoQ. 
Recommendation: We think expectations of weak 2Q12 numbers may cap the share price performance in the near-term. But the improved 2H12 outlook for chemical margins, together with accruing synergistic benefits and growth to be enabled by future investments, will make for long-term value creation and earnings upside, which will eventually prompt a valuation re-rating. PTTGC currently trades at an FY12 PER of 8.9x, below its long-term mean of 10.0x and a 25% discount to the Asian average of 11.3x.