GGC’s 2Q23F (Aug. 8) will be unexciting, in our view, with a slim profit of only Bt12mn, down 97% YoY and 69% QoQ. We expect a slightly better performance of methyl ester (biodiesel), but insufficient to offset a weaker fatty alcohol (FA) segment, which was hurt by lower product spread. We see 2023F earnings as challenging with downside risk to net profit forecast due to excess biodiesel capacity in Thailand and weaker FA product spread, as demand is being hurt by an uncertain economic outlook and abundant supply. Although there is no new share price catalyst, the 19% fall in share price YTD should largely price in the weaker performance. Neutral with TP of Bt13.40/share, on 1.2x PBV (2023F).
Methyl ester (biodiesel) driven by sales volume growth. Higher consumption of high-speed diesel in the domestic market drove GGC’s biodiesel sales volume in 2Q23 up 30.5% YoY and 5% QoQ to a 2-year high of 105mn liters on a full-quarter mandate of 7% biodiesel content. Utilization rate remained low at 69% vs. 85% pre-COVID, though above industry average of 45%. Competition in domestic ME appeared intense, implying more discount offered to buyers. Coupled with weaker refined glycerin spread (-55% YoY and -15% QoQ), we expect this segment’s adjusted EBITDA margin to remain low at only 0.3% vs. the 5-year average of 3.8%.
Narrower spread for fatty alcohol segment. Contribution from the FA segment is expected to remain weak although the plant resumed normal operations after a planned shutdown to replace the catalyst in 1Q23. We believe the segment’s sales volume was pressured by slower demand in the global market caused by the uncertain economic outlook. 2Q23 sales volume is expected to fall 11% YoY, flat QoQ, to 22kt vs. 5-year average of 25kt/quarter. Slower demand in 2Q23 also pulled FA price (mixed chain) down 48% YoY and 13% QoQ to a 3-year low of US$1,412/t and spread over CPKO was halved YoY to only US$553/t (-24% QoQ). Hence, we estimate a 43% YoY and 37% QoQ fall in FA segment adjusted EBITDA, though this should be partly offset by stock gain vs. stock loss in 1Q23.
Downside risk for 2023F forecast persists. GGC’s 1H23 was much weaker than previously expected, despite continued improvement in biodiesel demand and 2H23 outlook is bleak, in our view, given thin product spreads for both biodiesel and FA, with the latter pressured by slower-than-expected demand recovery in the regional market, mainly China. Hence, we see downside risk to our 2023 earnings forecast. We also view that the market’s expectation that El Nino will be detrimental to CPO output, driving up biodiesel market price, is premature given that the effect of this year’s El Nino on production and trade will be seen more in 2024, as oil palm trees are resistant to water stress, though an extended drought would weigh on yield and quality of the fruit. (S&P Global)
Risk factors: Volatile CPO and CPKO prices may cause stock loss and lower product spread. The government’s wobbly policy on biodiesel mandate for domestic high-speed diesel also hurts demand for ME in the medium term.
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