PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Above estimates: PTTGC posted a 2Q12 net profit of Bt851m, down by 91%, both YoY and QoQ. Stripping out a gain on a bargain purchase (the Perstorp acquisition) of Bt162m, a gain on oil hedging of Bt302m, a loss on inventory and LCM of Bt6,187m and a Bt518m FX loss, core profit would be Bt7,092m, down by 23% YoY but up 11% QoQ. The result was 15% above our estimate and 21% ahead of the consensus, due to a shallower-than-expected FX loss and a greater-than-modeled reversal of income tax expenses.
Results highlights: The key factors behind the YoY earnings contraction were: 1) weaker market GRM (US$4.3/bbl versus $6.4/bbl in 2Q11), 2) slimmer chemical spreads—PX spread softened 8% YoY to $567/t, while olefins & polymer over Ethane spreads fell by 1-28% YoY—and 3) losses on inventory and LCM of $8.8/bbl (against inventory gains of $2.3/bbl in 2Q11 and $4.9/bbl in 1Q12). The key QoQ core profit growth driver was sales volume, both aromatics (up 21% QoQ to 0.51mt for main products) and olefins (up 6% QoQ to 0.62mt for main products), due to more Ethane supply from PTT and fewer planned shutdowns.
Outlook: PTTGC’s 3Q12 bottom-line is expected to bounce strongly QoQ, driven by inventory gains and a reversal of LCM. Moreover, its 3Q12 core profit should rise QoQ, driven by greater sales volume, brought about by higher run rates at olefins plants and fatter chemical margins.
What’s changed? Although 1H12 net profit represents only 43% of our FY12 forecast of Bt24,839m, we maintain our projection unchanged, as 2H12 earnings are expected to increase HoH, driven by greater sales volume, fatter chemical margins and inventory gains and a reversal of LCM. 
Recommendation: We think that the faster-than-expected conclusion of the gas cost increase will lift overhanging concerns surrounding PTTGC. The stock has already priced in worries about the global economy and anticipation of the Ethane cost rising, we believe. 2H12 earnings growth will be driven by a rebound in chemical spreads, prompted by high seasonal demand and stable high oil prices, which should boost the share price going forward. Incipient signs of a Chinese economic recovery would also lend price support. PTTGC currently trades at an FY12 PER of 11x, a 19% discount to the Asian average of 13.7x.