PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Stock loss depresses 2Q12’s profit 91.4%qoq as expected
PTTGC posted 2Q12’s net profit at B851m, plunging 91.4%qoq as expected. The significant decline in the profit has resulted from loss on stock of oil and aromatics at around B5.1bn and loss on inventory provision using Net Realizable Value (NRV), which is similar to oil inventory valuation using lower of cost or market (LCM), at B1.1bn, comparing to a stock gain of B3bn in 1Q12. However, considering norm profit, adjusted EBITDA has increased from the prior quarter due to support from an increase in overall petrochemical production volume (from a resumption of the production at a full capacity after a maintenance shutdown in 1Q12) which could offset a decrease in spread of aromatics products. Average market product to feed margin in 2Q12 has dropped by 2.6%qoq to US$191/ton, while spread of olefins still stabilized. In addition, market GRM in 2Q12 has risen by 14% qoq to stand at US$4.32/bbl due to a full run of condensate residue splitter (CRS) (PTTGC has ended the sale contract of condensate residue to PTT since 31 January 2012) which allows the company to produce and sell diesel oil at a larger volume. Moreover, decreasing crude oil price has also made market GRM increase. Overall, net profit of PTTGC in 1H12 equated B10.7bn, decreasing 45.4% from the same period last year and comprising 44.1% of our FY2012’s net profit forecast.

Maintain 2Q12’s forecast. Recovery foreseen in 2H12
We maintain our earnings forecast for FY2012 with positive perspective that earnings in 2H12 would revert to normal as reflected by price and spread of petrochemical product which have recovered after passing a year’s low in 2Q12 because operators who suffered from the economic downturn and did not stock new raw material but used up the old stocks in 2Q12 have to start restocking again in 3Q12. Furthermore, 3Q12 is a high season for production to prepare for the year-end festive season, so it would help recover the petrochemical business. Similarly, market GRM is projected to stabilize at US$5/bbl from regional demands which are anticipated to rise again following the economic recovery and an approach of Ramadan in Indonesia in which
demand for gasoline usually rises. Moreover, August-October of every year is the period when many refineries in Asia, America, and Europe undertake a maintenance shutdown to prepare for an operation in the coming winter (in late 4Q12), so some of the supply would disappear from the market, thus pushing up price of finished oil. Additionally, there is a high chance for the company to book stock gain again in 2H12 from oil price during the period which tends to hike after hitting a low in 2Q12, reflected by Dubai crude oil price which has risen by 14% from end-2Q12 to US$105.63/bbl.

Buy on weakness. Current share price has only 7% upside left
Fair value at end-2012, using DCF, is B65.45/share. We maintain our recommendation to buy but on weakness as the current market price has only 7% upside from the fair value while earnings since 1 August 2012 would be depressed by an adjustment of pricing formula for petrochemical raw material sale to PTT, which will make raw material cost of PTTGC increase by US$40/ton (already included in our forecast).