PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
PTTGC’s recent share price correction is unjustified, given that: 1) its expected QoQ profit growth through 1Q14 is on track, 2) the olefins market has entered an uptrend and 3) GRM has seasonally bounced. We think the market is too concerned over the possibility of a new round of mergers within PTT group—if there were to be a merger with IRPC, it would be after 2015 and it would have to create value for the firm. The current valuation is undemanding—PTTGC trades at an FY14 PER of 8.6x, a steep discount to the regional mean of 14.0x. Furthermore, its FY14 dividend yield of 5.2% is significantly higher than the Asian mean of 3.4%.
4Q13 core earnings should rise QoQ but soften YoY 
We expect PTTGC to post a 4Q13 net profit of Bt7,366m (down by 31% YoY and 23% QoQ) and core earnings of Bt7,904m (down 6% YoY but up 20% QoQ). The expected YoY core profit contraction is due to: 1) a slimmer market GRM, 2) weaker aromatics spreads and 2) a lower MEG spread. The assumed YoY dive in net profit is because of: 1) an FX loss (against an FX gain in 4Q12) and 2) in 4Q12 the firm booked a one-off Bt944m gain on a bargain purchase. The key drivers of the anticipated QoQ core earnings growth were: 1) greater sales volume, 2) fatter olefins spreads and 3) a bigger Benzene spread. Lower inventory gains and a deeper FX loss in 4Q13 were the drivers of the expected QoQ bottom-line contraction.
GRM bounce & rising olefins spreads to drive 1Q14 earnings  
1Q14 core profit should expand QoQ (but soften YoY), driven by a greater market GRM and fatter olefins spreads. Seasonally high demand during the first-quarter coupled with a supply outage due to freezing cold weather in North America has pushed up the benchmark Singapore GRM in 1Q14-to-date by 51% QoQ (albeit still down 27% YoY) to US$6.2/bbl. Meanwhile, the broad demand recovery has driven up the HDPE spread in 1Q14-to-date by 4% QoQ (and 17% YoY) to $611/t.
However, PX spread has weakened 11% QoQ to US$422/t over the same period. Even though there will be a 35-day maintenance shutdown of the I1 plant in March, we expect 1Q14 sales volume to remain stable QoQ, as additional olefins volume from other plants (boosted by more feedstock supplied by PTT’s GSP#5) should offset the production loss.
Investment in a new world-scale aromatics project still far away   
PTT group is actively seeking new investment opportunities. A proposed big-ticket aromatics plant is currently under study. However, it is too early to assume that it will be built; if it were to be developed, it would use feedstock from IRPC’s UHV project (COD in 3Q15) and from PTTGC. The investment could be a JV between IRPC and PTTGC. If there were to be a merger between the two firms, it would be after IRPC’s UHV plant was completed, we believe.