PTT

PTT Plc 

PTT’s move to acquire a larger stake in coal producer Sakari was not unexpected. The offer, at a
28% premium to market price, is a tad high but not unreasonable given that a controlling stake will
allow PTT to boost production growth to support Thailand’s energy security. We are positive on this
acquisition as coal will not only diversify PTT’s earnings base, but also help to meet the group’s
strategic goal of achieving energy reserve security beyond its oil & gas portfolio. We maintain
Outperform and our SOP target price of THB453. Catalysts include recovery in downstream refinery and
petrochemicals. 

What Happened
PTT has announced a voluntary conditional cash offer for the shares it does own in Sakari at S$1.9/shr (US$1.6/shr), representing a 27.5% premium to its closing price on Friday.It currently holds a 45% stake in Sakari. The additional 55% stake would represent 1.5% of PTT's assets
worth THB1.5tr. The transaction is expected to be completed within 28 working days from today and be completed in Oct 2012. PTT plans to delist Sakari if its shareholding exceeds 90%. Sakari currently has 146mt of reserve, and 1,505mt of resource.

What We Think

The offer price for Sakari is slightly expensive and implies: 1) 15x CY12 P/E; 2) 2.6x NAV; 3) US$12/tonne reserve; and US$1.2/tonne resource, based on the forecasts of CIMB analyst Lee Wen Ching. According to her, the offer price appears decent relative to Sakari’s historical
valuations of 14x P/E (but is below its average 3.6x P/B).

What You Should Do
We remain positive on PTT and maintain our Outperform rating and target price of THB453. An additional 55% stake in Sakari will boost PTT's 2013F earnings of THB132bn by 1.3%.Key catalysts for PTT are its core gas earnings, PTTEP’s E&P earnings growth, and the recovery in the
downstream refinery and petrochemical businesses. For Sakari, analyst Lee Wen Ching recommends shareholders accept PTT’s offer.
 
Why acquire more coal?
PTT cited three reasons for its decision to acquire Sakari. Firstly, given that it already owns a 45% stake, any additional stake will require a mandatory tender offer. Secondly, PTT needs a majority stake of more than 50% in order to control the company, and make any necessary strategic moves. Finally, the acquisition is in line with PTT’s long term strategy of adding more coal assets
and boosting earnings from coal to 15% by 2020 vs. only 5% currently.

Based on Thailand’s most recent Power Development Plan (PDP) 2010 revision 3, updated and released in June, the country will need more coal for the four coal-fired power plants with a total capacity of 4,400MW that will be built by state-owned Electricity Generation Authority of Thailand (EGAT) by 2030.Given public resistance to coal-fired power plants, these facilities are expected
to be located in the south of Thailand away from large cities but with access of a sea port for coal imports. PTT should benefit as a coal provider to these facilities.

PTT believes that while Sakari currently has 146mt of coal reserves to last 12 years of production, there is potential for a coal reserve upgrade by 100mt-200mt from the conversion of 1.5bn tonnes of coal resource into coal reserve. This is the key driver for its decision to acquire Sakari, in our view. Also, as a state-owned enterprise (SOE) 51%-owned by the Ministry of Finance,PTT needs to secure more energy resources of oil & gas, and coal for Thailand’s future demand, which is increasingly dependent on gas. However, we believe the move to acquire coal will not only serve the national mandate as an SOE, but also help to diversify and improve the quality of PTT’s earnings by entering into other energy sources, given the high volatility of oil & gas prices that could lead to lower earnings quality.

Is the premium justified?
By offering to buy the remaining Sakari shares at US$1.6/shr, a 28% premium to last Friday’s closing price, we believe the offer price is a tad high but not unreasonably so. This offer price is 44% lower than the previous offer price of US$2.86/shr to acquire a 17% stake in SAR. The main reason for the difference is coal price outlook; the 2011 market was far more bullish on coal prices.
We think that the offer price of US$1.6/shr is fair for SAR this time as it reflects EV/reserve at US$13.8/tonne, near the upper-end of the average EV/reserve values of US$10-15/tonne. In terms of EV/resource, the valuation of US$1.8/tonne also indicates a fair value compared to the US$2/tonne average for regional peers.

Valuation
We remain positive on PTT and maintain our Outperform rating and target price of THB453. If PTT is successful in acquiring the additional 55% Sakari stake by October 2012, its 2013F earnings of THB132bn will be boosted by a further 1.3%. We however expect earnings momentum to come from three catalysts of: 1) PTT’s core gas earnings, mainly on strong gas demand in the
domestic market; 2) solid earnings growth of PTTEP from the start-up of its new project, Montara; and 3) the earnings recovery in 2H12 for its downstream refinery and petrochemicals on improved margins plus inventory gains from the rising oil price. For Sakari, our analyst Lee Wen Ching recommends shareholders accept PTT’s offer.