GGC’s 2Q23 net profit was Bt7mn (-98% YoY and -82% QoQ) due to feeble product spreads, especially for fatty alcohol (FA). Profit was padded by Bt23mn net inventory gain in the methyl ester segment. 2023F outlook is challenging 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. The 1H23 profit of only Bt47mn was disappointing and led us to slash our 2023F by 56%. Without a new share price catalyst and poor dividend yield, we downgrade to Underperform with TP cut to Bt12.20/share from Bt13.40, 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 2Q23 biodiesel sales volume up 31% YoY and 5% QoQ to a 2-year high of 91mn liters on a full-quarter mandate of 7% biodiesel content. Utilization rate remained low at 73% 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), the segment’s adjusted EBITDA margin was low at only 1.2% vs. the 5-year average of 3.8%, though this was better than only 0.1% in 1Q23.
Fatty alcohol: adjusted EBITDA margin fell to 5-quarter low. Contribution from the FA segment shrank with adjusted EBITDA of only Bt101mn (-83% YoY and -63% QoQ) vs. 5-year average of Bt190mn/quarter despite higher utilization rate. The segment’s sales volume fell 12% YoY and 1% QoQ to 21.7kt vs. 5-year average of 25kt/quarter as demand in key market China was lower than expected. Weak demand in 2Q23 also pulled FA price (mixed chain) down 49% YoY and 7% QoQ to a 2-year low of US$1,525/t and product-to-feed margin of the segment narrowed 24% YoY and 18% QoQ to US$443/t. Hence, adjusted EBITDA margin fell to a 5-quarter low of only 8.9% vs. 20.2% in 1Q23.
Earnings forecast slashed 56%. GGC’s 1H23 net profit of Bt47mn was much weaker than expected, despite continued improvement in biodiesel demand in the domestic market. The 2H23 outlook remains 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, especially in China. Hence, we revise down our 2023 earnings forecast by 56%. Key to watch is the impact of El Nino on CPO output, which could drive up biodiesel market price, though we feel playing on this is premature since the effect of this year’s El Nino on production and trade will be more evident in 2024. We also cut our TP to Bt12.2/share, based on 1.2x PBV (2023F).
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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