PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Downgrade to Hold. Petrochemical business still pressured in mid term Petrochemical price surges only in short term but still pressured in mid term

According to the analyst meeting yesterday, there was no new issue for
PTTGC. In the short term there would still be a recovery of petrochemical
demands on seasonal effect from goods production for the festive season.
Moreover, operators who suffered from the economic downturn in 2Q12 and
did not stock new raw material but used up their existing stocks instead have
to start restocking again in 3Q12. However, in the mid and long term, it is
still uncertain whether the growth in demand would be constant or not as
there are still concerns about a rebound of global economy, especially those
of the super power like the US, China, and Europe. Nevertheless, the
company would still march forward with its investment plan with investment
budget for the next 5 years at US$4.5bn. The investment plan can be divided
as follows: 1) US$1bn for investment expansion for increasing efficiency of
existing projects such as debottlebecking, 2) US$3bn for an expansion of
investment in more specific downstream products in order to create value
added, such as polyurethane and polycarbonate, and 3) US$500m for an
expansion of investment in biochemical product. The money for the
investment will come from 1) operating cash flow by US$2.5bn, and 2) debt
refinancing by US$2bn as the current net debt/equity ratio is still low at only
0.42x (compared with the sector’s average of 1x), which is enough to create
more debt.

Maintain 2012-2013’s forecast. Recovery foreseen in 2 half 2012

We maintain FY2012-2013’s profit with positive perspective that earnings in
2H12 would revert to normal, evidenced by prices and spreads of
petrochemical products which are now recovering after passing a year’s low
in 2Q12. At the same time, 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. Furthermore, there is a high chance for the
company to return to book stock gain in 2H12 following global oil price during
the period which tends to rally after hitting a bottom in 2Q12, reflected from
Dubai crude oil price that has risen by 20% from end-2Q12 to stand at
US$111.29/bbl.

Downgrade to Hold in short term. Recommend switching to PTT

Fair value at end-2012, using DCF, is B65.45/share. The share price has risen
significantly by 14% within only 2 months and already got near our fair
value. Consequently, in the short term we downgrade our recommendation
from Buy to Hold and recommend switching to PTT as it has benefited from
an increase in oil price and 2H12’s earnings of the sector that will improve
from 1H12. Moreover, the current share price of PTT has around 14% upside
from the fair value. For the rumor about extra dividend, the company has
confirmed no extra dividend but maybe an interim dividend. For FY2012, we
estimate minimum dividend payment from its policy of dividend payout ratio
of 30% at B1.64/share or a dividend yield of 2.7%p.a.