PTTGC – Another overhang lifted

PTTGC’s HDI and derivative business in France has been put into judicial reorganization after its improvement initiatives program was unable to turn things around in the face of intense competition and a rapidly changing business landscape. This will hit 2024 earnings with a one-time loss: Bt8bn asset impairment plus Bt1bn provisions against restructuring cost and is part of its restructuring announced in August with total impact on 2024 profit of ≤Bt20bn. We thus revise our 2024F down from net profit of Bt7.5bn to net loss of Bt12.5bn. We also cut our TP (end-2024) from Bt35 to Bt32/share on 0.5x PBV (2024F), or -1.5SD. This implies 7.2x EV/EBITDA (2024F) vs. 10-year average of 9x, still below regional average of >10x. We believe the move lifts the overhang on share price and valuation is undemanding at only 0.4x PBV (2024F). Maintain OUTPERFORM rating.

Vencorex business in France to reorganize. PTTGC announced that its performance chemical business under Vencorex in France has been put into judicial reorganization under Book VI of the French Commercial Code. The two firms, Vencorex France and Vencorex TDI, are held by wholly owned subsidiary Vencorex Holdings. The judicial reorganization will take 3-4 months to finalize but PTTGC will record asset impairment of Bt8bn in 3Q24 plus Bt1bn provisions against restructuring cost^1/. Despite intensive efforts that included operational improvement, contract renegotiations and business model restructuring, the firms could not be turned around, facing fierce competition and high energy cost in Europe. Vencorex’s HDI business (high value products) in Thailand and the US will continue with feedstock obtained from elsewhere to replace imports from plants in France. The divestment of these is expected finish by end-2024.

More impairment charges to be recorded in 4Q24. As the analyst meeting in Aug management said it is continuing to reshape its portfolio as the business landscape changes, with a focus on those losing competitiveness. After Vencorex, we expect a few more assets, including PTTAC (~Bt9bn) to be reviewed with expected impairment charges of no more than Bt11bn to be recorded in 4Q24. Despite the one-time hit to the bottom line, management expects positives to come out of this restructuring. For Vencorex alone, it expects a positive impact on net profit of Bt4bn in 2025 with no loss from Vencorex (based on net loss of €56mn or Bt2bn in 1H24). Profit contribution from Vencorex’s businesses in Thailand and the US is expected to be minimal.

2H24 core profit to improve HoH but not offset one-time losses. Although slower demand and a supply imbalance in the petrochemical market will continue to hamper the petrochemical business, we expect core profit to improve HoH in 2H24 on the recovery of GRM, especially for middle distillates. More ethane supply from PTT will also boost olefins profitability upon full production of Erawan field. This is, however, unlikely to cover the Bt20bn in one-time charges and related expenses for business restructuring and we thus cut 2024F from net profit of Bt7.5bn to net loss of Bt12.5bn.

TP to Bt32 from Bt35. To incorporate the asset impairments, our PBV-based TP is cut by 8.6% from Bt35 to Bt32/share, based on 0.5x PBV (2024F) or -1.5SD. This implies 7.2x EV/EBITDA (2024F) vs. 10-year average of 9x, still below regional average of >10x.

Key risk factors: 1) Volatile crude oil price and product spread for oil refining and petrochemicals, 2) higher feedstock cost due to lower gas feedstock, 3) asset impairment, 4) regulatory change on GHG emissions and single-use plastics (<3% of capacity), and 5) change in allocation of domestic gas supply to petrochemicals. Key ESG risk factors include the environmental impact of its business and how it adapts during the transition to clean energy and circular economy.