PTT Global Chemical

PTT Global Chemical Plc (PTTGC)

Investment thesis
The key messages at the analyst meeting reaffirmed our optimistic view of PTTGC’s short- and long-term growth prospects. Expectations of a core operational improvement in 1Q14, driven by fatter GRM and product spreads, should boost the share price in the near-term. Moreover, the start of an olefins margin up-cycle this year will facilitate long-term stock price upside, we believe. PTTGC currently trades at an FY14 PER of 8.9x, steep discounts to its long-term average of 9.9x and the regional mean of 16.5x. Furthermore, its FY14 dividend yield of 5.1% is significantly higher than the Asian average of 3.1%.   
Strong core earnings growth expected for 1Q14
Seasonally high demand has pushed up the benchmark Singapore GRM in 1Q14-to-date by 55% QoQ (albeit down 25% YoY) to US$6.3/bbl. Meanwhile, a broad demand recovery has boosted the QTD HDPE spread 3% QoQ (and 13% YoY) to $604/t. However, PX spread has dropped 17% QoQ to $372/t. As there will be maintenance shutdowns at several olefins plants and a 23-day unplanned shutdown at the I4-1 plant during 1Q14, we expect sales volume to decline by 10% QoQ. However, PTTGC’s 1Q14 core profit is still expected to rise QoQ (but soften YoY), as fatter GRM and olefins spreads and a lower feedstock cost (with greater use of Ethane) should more than offset the effect of lost production.
2014—an olefins up-cycle to start; aromatics to enter a downturn
The olefins up-cycle will be fueled by demand growth in the face of fewer capacity additions. Improved demand-supply dynamics are expected to boost olefins prices and spreads. The HDPE-Naphtha spread is forecast to rise 10% YoY to US$622/t, while the LDPE-Naphtha spread is projected to increase 24% YoY to $759/t this year. In contrast, the aromatics market looks set to slump in 2014, due to an influx of new capacity. The PX-Naphtha spread is forecast to dive 27% YoY to $411/t, while the Benzene-Naphtha spread is projected to dip 4% YoY to $364/t. GRM should be sustained stable YoY in 2014, supported by delays to the start-ups of new plants.  
Promising long-term growth prospects 
PTTGC’s synergistic and investment projects have mostly progressed as planned. The firm’s Excellence programs and synergy projects contributed US$231m of additional EBITDA in FY13 and another $237m is targeted for this year. Moreover, the Ethylene Oxide (EO) expansion (up 27% to 426kta) and Phenol 2 project (250kta) will be completed in 3Q15. The targeted completion date for the PX expansion project (up 10% to 1.3mta) is 4Q15. In addition, the PTTPE Cracker debottlenecking project (up 12% to 1.12mta) is expected to be finished in 2016. PTTGC’s board just approved an LLDPE expansion (up 75% to 700kta). The investment cost will be about $272m with completion slated for 2017.