PTT Global Chemical

In line with estimate

PTTGC reported a 3Q14 net profit of Bt7,591m, down 21% YoY but up 25% QoQ. Stripping out a Bt425m gain on oil hedging, a Bt271m FX gain and a Bt2,841m inventory loss, 3Q14 core earnings would be Bt9,201m, up by 39% YoY and 47% QoQ. The result was in line with our estimate and the consensus.

Results highlights

A loss on inventory (against an inventory gain in 3Q13) led the YoY bottom-line dive. The key factors behind the substantial core profit growth were: 1) greater olefins sales volume, 2) fatter olefins margins, 3) expanded aromatics margins and 4) a lower blended gas feedstock cost (see Figure 2). As Ethane supply from PTT’s GSP#5 flowed smoothly during the quarter, the EBITDA margin of the olefins business increased to 28% in 3Q14 from 25% in 2Q14 and 26% in 3Q13. As such, the earnings contributions of the olefins and aromatics businesses outweighed the effect of a smaller refinery unit profit.

Outlook

We anticipate that 4Q14 core profit will expand YoY, driven by greater olefins sales volume and fatter olefins spreads. The utilization rates of the olefins and polymers plants should rise both YoY and QoQ, due to fewer planned shutdowns and greater Ethane supply from PTT’s GSP#5. However, PTTGC’s 4Q14 core profit looks set to fall QoQ, due to lower aromatics sales volume as a result of a 42-day planned shutdown at Aromatics I plant and slimmer aromatics spreads. Also, a 4Q14 inventory loss—which looks almost certain—would squeeze the bottom-line.   

What’s changed?

We have cut our FY14 net profit forecast by 9% to Bt25,557m to reflect the inventory loss booked in 3Q14 and the expected inventory loss for 4Q14 ( the result of falling crude prices).  

Recommendation

Concerns over inventory losses caused by falling crude prices may weigh on sentiment toward the stock in the short-term. But strong earnings at the olefins business (buoyed by fatter spreads) should mitigate the impact of lower crude prices, we believe (in contrast to other Thai refinery-cum-chemical firms, whose refinery operations are much more central to their bottom-lines than is the case for PTTGC).

We have rolled over our investment horizon to YE15 and derived a new DCF target price of Bt85. The stock trades at an undemanding FY15 PER of 7.8x, discounts to its long-term average of 10.6x and to the regional mean of 14.6x. Furthermore, its YE15 PBV of 1.0x is below its long-term average of 1.2x and the Asian mean of 1.3x.