Mixed support from analysts

Even though PTT Chemical's  stock is languishing at around a 47-per-cent drop from its 52-week high at Bt137 in October last year, securities analysts are giving it mixed recommendations.

Of 21 brokers who updated their research papers this month, eight recommended "buy" the stock with a target price in the range of Bt86 to Bt163, two recommended "trading buy", seven recommended "hold" and four recommended "sell".

PTT Chemical (PTTCH) is the country's largest olefins producer and will be one of the top three ethylene producers in the Asia-Pacific once the new upstream capacity expansion to its ethane cracker and for low-density polyethylene (LDPE) and linear low-density polyethylene (LLDPE) production is completed by the end of 2009.

PTTCH has got an edge over other olefins manufacturers as it has a favourable feedstock arrangement and product off-take agreement with PTT, its parent firm. PTTCH's planned capital expenditures are significant at Bt85.3 billion from 2007-2011, over half of which is earmarked for a large-scale olefins expansion that includes a new gas-based olefins cracker and existing plant improvements. The remainder is for the expansion of high-density polyethylene (HDPE) capacity and other speciality chemicals projects.

KGI Securities (Thailand) is one of those bullish over PTTCH's outlook. It has maintained outperform recommendation for the stock with a target price of Bt146.

It expected PTTCH to report second-quarter core profit of Bt6 billion, up 100 per cent year-on-year and 16.4 per cent quarter-on-quarter, due mainly to higher sales volume and lower feedstock  costs.

Including foreign exchange loss of Bt536 million, the broker anticipated net profit to be Bt5.4 billion, up 82.1 per cent year-on-year but down 5.2 per cent quarter-on-quarter.

The estimate was based on assumptions of an increase in sales volume led by upstream products, weaker average product spreads than the first quarter due to a spike in naphtha, and higher gas feedstock usage.

In the second quarter, PTTCH used naphtha at 15 per cent of total feedstock, down from 25 per cent in the corresponding period last year, and 18 per cent in the first quarter, the broker said.

An increase in the use of gas feedstock would be another key factor supporting earnings due to cheaper costs than naphtha.

It anticipated PTTCH's second-half earnings to be weak due to lower product spreads from new supply coming on stream and a lower utilisation rate from a planned shutdown. 

The influx of new supply would pressure petrochemicals into a downturn starting from the second half  of this year. However, the broker believed PTTCH is in a good position to cope with the lower product spreads as it has the advantage of low gas feedstock costs compared with naphtha-based producers. 

A strong financial position and cash flow would enable PTTCH to pay an attractive dividend of Bt6 per share, the broker said.

Although the broker expected a less favourable contract for the pricing formula of gas feedstock with PTT, PTTCH's competitive advantage of being a gas-based producer would remain.

Tisco Securities has downgraded PTTCH's stock from buy to hold and cut a 12-month target price from Bt133 to Bt95.

PTT has planned to change the "net back" pricing formula for gas supplied to PTTCH, implying higher feedstock costs and lower earnings for the latter. Currently the cost of ethane feedstock supplied by PTT to PTTCH is based on a profit sharing ratio of PTT (20 per cent) and PTTCH (80 per cent). If PTT's share was raised to 25-35 per cent, the broker estimated that this would reduce PTTCH's earnings in 2009 by 9-28 per cent.

The broker forecast PTTCH would post second-quarter net profit of Bt5.3 billion, a rise of 79 per cent year-on-year.

It assumed that the ethylene cycle will transition through the second half with a clear downturn by 2009 driven by new capacity in the Middle East and China.  

As the outlook for related products propylene, MEG and HDPE is tied to the ethylene cycle, the broker predicted narrower spreads going forward.

It then conservatively forecast that PTTCH's earnings would decline in the second half on lower spread margins.

SCB Securities is among the less optimistic over PTTCH's outlook by cutting recommendation from buy to under-perform on the increasingly bearish view on its margin outlook, dragged down by the industry downturn and unfavourable change in cost structure.

The broker also cut its target price by 43 per cent from Bt132 to Bt75.

PTT Chemical is expected to see its earnings before interest, tax, depreciation and amortisation margin plunge from 34 per cent in 2007 to 14 per cent in 2010 on the combination of a change in the "net back" pricing formula for its ethane cost from 80:20 to 70:30 in 2010 and lower olefins margins as the industry turns down from the second half this year.

The broker predicted the company would record a second-quarter net profit of Bt5.6 billion, down 2 per cent quarter on quarter but up 88 per cent year on year.