PTT Global Chemical

PTT Global Chemical Plc (PTTEP)

BUY reaffirmed despite weaker profit QoQ expected in 2Q13F. We maintain our positive view on PTTGC’s earnings outlook and its future growth from new capacity. True, PTTGC’s profit is likely to slip QoQ in 2Q13F from a maintenance shutdown of the refinery unit and PE plants but this is only a hiccup before earnings recover in the latter half of the year. This may open another opportunity to increase position in the stock to gain benefit from its LT growth path. We derive our TP of Bt90/share from 1.6x PBV (+0.9SD) on 2013 earnings. This implies P/E of 11x vs. current 13x for regional peers. 
Feasibility study of joint investment with Pertamina progressing well. The management reaffirmed the timeline of the joint investment with Pertamina, expecting the final investment decision to be made by end-2013 when the feasibility study is finished. The study is progressing well in identifying the downstream products for the complex. If it decides to proceed, the project would start in 2014 and take 3-4 years to build. Management is positive towards the market outlook in Indonesia with strong potential in the market and labor force.
Investment burden not alarming. Total investment value of the complex is estimated at ~US$4bn, 56% of which would financed by debt as project finance based on D/E of 1.5x. PTTGC would have to inject ~US$800mn for its 49% interest. However, the door is still open for a third party to enter as a strategic partner for the downstream project. Hence the financial burden for PTTGC should not be of concern. In addition to this investment PTTGC is also committed to investment of US$4.5bn during 2013-17F, to be financed almost equally by internal cash flow and debt.
More capacity from ethylene cracker is under study. PTTGC is also studying a debottlenecking of the ethylene cracker of subsidiary PTTPE from the current 1mtpa. The key issues being considered are the size of the debottlenecking and available gas feedstock. The company is discussing with PTT to process raw natural gas which currently bypasses the gas separation plant and transmitted directly to power plants. Management expects this project to start operations by 2016F.
Business excellence program to increase efficiency and profit. In addition to a higher utilization rate, PTTGC's earnings growth in 2013F will also be driven by its business excellence programs. Management estimates that ~US$50.76mn (9.3% of EBITDA) was achieved in 1Q13 from total target of US$177mn for full-year 2013 (~9% of our projected EBITDA for 2013F). The key contributor was marketing excellence at the olefins business that led to capturing more value from mixed C4 for the export market where there is a shortage of supply as naphtha-based crackers cut back production.