Vinythai

Below estimate

VNT reported a 3Q14 net profit of Bt4m, down by 92% YoY and 98% QoQ. The 3Q14 core profit was also Bt4m, down by 90% YoY and 98% QoQ. The result was somewhat below our estimate, due to lower-than-expected sales volume and a lower corporate tax credit (deferred tax asset) than modeled.  

Results highlights

The weak core operation was due to: 1) a slimmer PVC spread (down 12% YoY [flat QoQ] to US$302/t), 2) a weaker full product spread (PVC spread + caustic soda margin), assumed to have slipped 7% YoY (but increased 5% QoQ) to $543/t, 3) lower sales volume, both YoY and QoQ, due to technical problems, and 4) a lower corporate tax credit—Bt2m in 3Q14 against Bt28m in 3Q13 and Bt247m in 2Q14.

Outlook

VNT’s 4Q14 core operation is expected to decline both YoY and QoQ, due to a weaker PVC spread. The average PVC spread in 4Q14-to-date has weakened by 12% YoY and 1% QoQ to US$287/t, due to a rising Ethylene feedstock cost and low seasonal demand for PVC. However, greater sales volume (enabled by the resumption of operational normalcy following technical problems) should mitigate the impact of slimmer product spreads on earnings. 

What’s changed?

We have slashed our FY14 net profit forecast by 32% to Bt280m to reflect: 1) a 2% cut to our sales volume assumption to 246kt, 2) a 7% slimmer PVC spread assumption to US$280/t and 3) a Bt39m lower corporate tax credit assumption.

Recommendation

As the PVC spread is expected to slim back in 4Q14, we don’t see any obvious share price catalysts going forward. Our HOLD rating stands. However, we think the market has already priced in the weak product spread outlook. VNT currently trades at a YE15 PBV of 0.7x—0.5SD below its long-term average of 0.8x and a deep discount to the regional mean of 1.3x. As such, downside risk to the share price appears limited from here.