PTT

PTT Plc
We do not believe PTT can reap any benefits from the higher LPG prices just announced by the government until 2014 and foresee slowing earnings in 2014-15 from weakness at its core gas business. This has turned its risk-reward trade-off unattractive. We lower our FY13 EPS by 3.9% to incorporate a 4-month shutdown of GSP#5 and cut our SOP target price accordingly. We downgrade PTT from Neutral to Underperform on the back of its weakening earnings momentum with de-rating catalysts expected from lower margins for its core gas business and downside from operational shutdowns and rising subsidies. 
What Happened
Starting 1 Sep 13, the Thai government plans to raise LPG prices for cooking gas and transportation by THB0.50/kg/month over the next 12 months to reach THB24.82/kg by Aug 14. The hike is expected to benefit only the government’s oil fund, not PTT, as indicated by the government. Meanwhile, lightning damage to PTT’s Gas Separation Plant (GSP#5) should further erode its earnings, near term.  
What We Think
We disagree with the market’s view that PTT can reap benefits from this LPG price increase, as the government’s objective is clearly to shore up its oil fund ahead of oil-price uptrends. We believe gains from the LPG price increase will not accrue to PTT until 2015 when the ASEAN Economic Community (AEC) takes effect, forcing about energy price convergence. While the potential upside for PTT remains unclear, we estimate that if it occurs, PTT’s earnings could be bumped up by as much as 18%, using our 2013 earnings forecast.  
What You Should Do
We believe the risk-reward for PTT is not attractive, in view of its slower earnings momentum in 2014-15 and potential downside from widening subsidies for LPG and NGV, which could remain overhangs until 2015. We prefer PTTEP to PTT for its more attractive risk-reward and better earnings momentum in 2H13 and 2014, powered by volume growth and rising gas prices.