PTT Global Chemical

3Q14F profit pushed by olefins business to 17.9% rise QoQ to Bt7.2bn. The better aromatics business will be offset by worsened refinery biz from huge inventory losses (~Bt2.7bn) and lower market GRM. Also behind the QoQ increase will be the absence of Bt1.1bn extra expense booked in 2Q14 for business restructuring of associate Vencorex in France. We expect a 25.3% fall in profit YoY on weaker GRM and aromatics spread. The company plans to announce results on Nov 6. 

Olefins still key. Smooth gas feedstock from PTT’s GSP#5 brought with it better product spread and higher operating rate for olefins crackers. We estimate utilization rate at olefins crackers rose to 94% in 3Q14F from 91% in 2Q14. This improved plant efficiency, especially in terms of better feedstock allocation and utilities cost management. We expect EBITDA margin to improve to a normal 28% in 3Q14F from 24-25% in 1H14. PE plant utilization remained high at 104% in 3Q14F vs. 103% in 1H14. 

Wider product spread should lift aromatics performance. Aromatics product spread improved in 3Q14F due to maintenance shutdown of several regional players in early 3Q14. Benchmark spread of PX-condensate shot up 42% QoQ to US$473/t. BZ-condensate spread also rose 15% QoQ to US$424/t. We expect product-to-feed margin to surge to US$240/t in 3Q14F from US$86/t in 2Q14. Aromatics operating rate fell to 83% from 89% in 2Q14 due to a 15-day unplanned shutdown of aromatics complex #2 with total capacity of 1.1mtpa due to a problem at the platforming unit reactor.

Oil refining business could turn to the red. Weaker market GRM due to lower crack spread of middle distillate products continued to depress PTTGC’s oil refining business. We expect its market GRM weakened further to US$3.8/bbl in 3Q13F from US$4.4/bbl in 2Q14, still way below inventory loss of ~US$4.6/bbl. We also expect a hedging gain of ~US$0.7/bbl. Oil refinery performance is expected to be in the red with crude run down to 102% in 3Q14F from 103% in 2Q14. 

Earnings revision. We have lowered our assumptions for utilization rate and product spread and included expectation of inventory losses and this leads to a cut in our 2014 forecast of 9%. We also lower our product spread assumptions for 2015-16F and this reduces profit for those years by 4% each. This trims our TP to Bt79/share, based on 1.3x PBV (5-year average). We continue positive on PTTGC, driven by the olefins chain upcycle. Its valuation remains undemanding at 7.1x 2015 PE vs. 14.8x for regional peers. Downside risk lies in uncertainty of LPG feedstock price as the government engages in energy sector reform that could affect prices of LPG feedstock for the petrochemical industry.