PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
Despite expected impressive 1Q13 earnings, we think anticipation of a profit contraction in 2Q13 together with concerns about demand will cap PTTGC’s price performance in the near-term. In our view, incipient signs of a demand recovery in 2H13 would catalyze the share price going forward. Moreover, the scope for upside to PTTGC’s earnings from synergy-building and efficiency improvement projects, as well as a potential joint investment with Pertamina, would boost its long-term growth profile. The stock currently trades at an FY13 PER of 8.5x, a steep discount to the regional mean of 14.9x.
Expect strong core earnings expansion in 1Q13, driven by …
We expect PTTGC to post a 1Q13 net profit of Bt12,014m (up by 22% YoY and 16% QoQ) and a core profit of Bt10,775 (up by 82% YoY and 31% QoQ). The drivers were: 1) a fatter YoY GRM, 2) expanded aromatics and olefins margins, brought about by high seasonal demand in the face of tight supply, and 3) greater olefins sales volume.
…a strong refinery operation and a resilient chemical business
The refinery’s 1Q13 run rate was 101% in the face of heavy maintenance shutdown schedules among Asian refineries, which pushed up market GRM 16% YoY (but down 6% QoQ) to US$4.4/bbl. However, we estimate that accounting GRM dived by 58% YoY and 21% QoQ to $3.7/bbl, due to a stock loss (plus LCM) of $1/bbl (despite a hedging gain of $0.3/bbl).
On the chemical front, PX spread rose by 22% YoY and 12% QoQ to $681/t, while BZ spread surged by 151% YoY (but softened 2% QoQ) to US$429/t. HDPE spread increased by 39% YoY and 16% QoQ to $521/t and LLDPE spread jumped by 74% YoY and 13% QoQ to $516/t. In addition, LDPE spread rose by 35% YoY and 17% QoQ to $498/t. The run rates of olefins facilities rose both YoY and QoQ, as there were no gas feedstock shortages and no shutdowns during the quarter.  
Plant turnaround & chemical low season to squeeze 2Q13 earnings  
PTTGC’s 2Q13 core earnings are expected to weaken QoQ (but be flattish YoY), due to sales volume declines of both petroleum and chemical products and slimmer chemical spreads as a result of seasonally lower demand. The following maintenance turnarounds are scheduled during the quarter—40 days for the refinery, 40 days for the I4-1 plant, 15 days for the HDPE plant, 25 days for the LLDPE plant and 15 days for the LDPE plant. Furthermore, weakening crude prices indicate downside risk to PTTGC’s 2Q13 bottom-line, as there could be a stock loss and/or LCM.