PTT

PTT Plc 

What’s changed. The Energy Policy Management Committee (EPMC), chaired by the Minister of Energy, announced an increase in NGV price of Bt1/kg to Bt11.50/kg except for public transportation, and Bt0.62/kg for LPG for the transportation sector to Bt22/kg by raising the contribution to the Oil Fund. The price increase is effective from today, October 1. The EPMC said the increase in NGV and LPG price is in line with the National Council for Peace and Order’s (NPCO) promise to reform domestic energy prices to reflect actual cost. The increase in NGV price is hoped to encourage the operator, PTT, to expand its NGV network throughout the country. The committee did not say when the next increase would take place, since even after adjustment the prices are still way below the cost.    

Comment: This development in Thailand's energy price reform, reducing subsidies, is positive for the country's energy efficiency in the long term. This will realign domestic energy consumption to reflect the actual economic value of each type of energy, which will become scarce as the natural gas resource in the Gulf of Thailand gets used up. 

The higher NGV will give PTT some help, even though it is still ~23% lower than its actual cost of Bt15/kg. PTT has had to shoulder accumulated losses of ~Bt95.3bn since 2003 to June 2014. This loss has been amplified by the recent rise in oil price to >Bt20bn p.a. By our estimates, the Bt1/kg increase would cut its losses from NGV by ~Bt2bn/year (~1.8% of full-year net profit prior to the price adjustment). 

For the rise in LPG price, the difference will be collected by the Oil Fund to lower its negative balance, which means PTT will not benefit in the near term. At the same time, this is a positive sign for PTT by suggesting LPG price will be higher for PTT in the future. LPG prices are very likely to be raised again soon since the retail price for the transportation sector is still Bt0.63/kg below that for cooking gas. 

Earnings revision. We have raised our forecast for 2014-16F by 0.3-1.3% to reflect the price adjustment for NGV. This is based on the consumption of 6.4 tons/day (73% of total consumption) by personal cars and trucks. The remaining 27% is consumed by public transportation and taxis and this will be untouched at least in the near term. 

TP raised to Bt406, BUY maintained. We maintain our BUY rating on PTT with the price adjustment for LPG and NGV as a near term share price catalyst. This has eased market concerns about the impact of energy reform on PTT’s operations. We also raise our sum-of-the parts target price to Bt406/share, implying 16% total return, including ~3.6-3.7% dividend yield. The company should continue to benefit if energy prices are based on market mechanisms, which is the direction the NCPO is going, given its determination to foster sustainability of energy resources.