Thailand DBS Group Research. Equity FV Bt3.04 SET: 694.09 (Downgrade from Buy) Price Target : 1-year Bt3.00 (prev. Bt5.82) Reason for Report : Company visit ANALYST Vichitr Kuladejkhuna, CFA 66 (0) 2657 7826 vichitrk@th.dbsvickers.com FORECASTS AND VALUATION FY Mar (Btm) 2004A 2005A 2006A 2007F Turnover 3,263 3,300 4,322 4,581 EBITDA 856 745 623 955 Net Profit 721 561 343 625 Normalized Profit 704 528 331 625 EPS (Bt) 0.90 0.70 0.43 0.78 EPS Gth (%) 45.4 (22.2) (38.8) 0.8 P/E (x) 3.4 4.3 7.1 3.9 EV/EBITDA (x) 2.3 4.7 4.7 2.6 DPS(Bt) 0.35 0.28 0.17 0.31 Div Yield (%) 11.5 9.2 5.6 10.3 ROE (%) 34.7 16.8 9.7 16.3 Net Gearing (%) cash 31.3 13.1 0.7 Book Value (Bt) 4.03 4.34 4.50 5.09 P/Book Value (x) 0.8 0.7 0.7 0.6 SHARE PRICE CHART Bt 6.50 5.50 4.50 3.50 100-Day MA 2.50 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 AT A GLANCE Issued Capital (m shrs) 800 Market Capital (Btm/US$m) 2,432/ 64 Major Shareholders (%) Polyplex (Asia) Pte. Ltd. 53.5 Polyplex Corp. Ltd. 16.5 Free Float (%) 30.0 Avg Daily Volume ('000 shrs) 2,029 Earnings Rev : FY07: -49% Consenus EPS: FY06: Bt1.02 ; FY07:Bt0.95 Variance vs Cons: FY06: -57.9% ; FY07: -17.7% Sector: Packaging Bloomberg/Reuters Code: PTL TB / PTL.BK Principal Business : Manufactures BOPET film for the packaging industry. 3 August 2006 Weak prospects! PTL reported disappointing 1QFY07 net profit (ending Jun 2006) of Bt31m, tumbling 84% y-o-y and 58% q-o-q. Despite 49% y-o-y higher sales volume led by its new Turkey plant, the sharp drop reflected the severe contraction in product margins.! Prospects for subsequent quarters weak. The current oversupply of PET film could limit price hikes, while PTA (major raw material) price should increase as PX (paraxylene, raw material for PTA) spot price has reached a record high of US$1,400/ton in late Jul 2006. As a result, we expect earnings to remain weak at least until end 2006.! Downgrade to Fully Valued. Following weak 4QFY06 (ending Mar 2006) results, we expected margins had bottomed out and FY07 earnings to be supported by additional sales volume from the new Turkey plant. However, 1QFY07 net profit only accounted for 5% of our previous FY07 forecast. Hence, to reflect the anticipated strong rise in raw material prices, particularly in 2QFY07 (ending Sep 2006), we cut our FY07 net profit forecast by 49% to Bt343m (EPS: Bt0.43), and subsequently downgraded our target price to Bt3.00, based on 7x 2007 PE. We also downgrade our recommendation to Fully Valued, and recommend to switch to ATC (Buy, TP: Bt33) as ATC is a beneficiary of strong aromatics prices. PET film oversupply may last throughout 2006. Global utilization rate of PET film (thin & thick film; thin film accounts for c.80%) started to tumble in 2004 to 82% from 88% in 2003 due to large capacity addition, mostly in Asia. Utilization fell further in 2005 to 75% with more additional supply. This was reflected in PTL s gross margin, which averaged 29.8% in FY05, and narrowed to 26.8% in FY06. The most notable drop was in 4QFY06, when gross margin dropped to 18.2% from 28.3% in 3Q06, which we thought had bottomed out. However, margin continued to drop further to 14.5% in 1QFY07 due mainly to rising raw material costs. In our discussion with PTL management, the company expects the oversupply situation to improve in 2007. But in the current market environment, we foresee limited opportunity for PET film producers to raise selling prices to fully capture the rising raw material costs. Unexpected rise in raw material prices. PTL s raw materials for producing PET film are PTA and MEG; PTA s raw material is paraxylene (PX). PX price has been strong since Jan-Mar 2006, which resulted in high PTA price that hit PTL s margins in 4QFY06. The continued rise in crude oil prices during Apr-Jun 2006 led to higher raw material costs. Together with rising electricity tariff and higher diesel cost, PTL s gross margin dropped further to 14.5%. PX price continued to rise to a record high in July on the back of rising crude oil prices and news of project delays relating to new PX supply in the Middle East. High crude oil prices, resilient PX demand, and delays in new supply should continue to support strong PX price in the near term, until the end of 2006. www.dbsvickers.com Refer to important disclosures at the end of this report
What could trigger margin rebound? (i) Product prices: current selling prices are limited by oversupply. If product margins remain narrow, high-cost producers will be forced to reduce capacity or shut down. This should ease competition and allow the remaining producers to pass on higher costs to customers by gradually raising product prices. (ii) Costs: A sharp drop in crude oil prices should help to lower power and fuel expenses, and potentially lower raw material costs. However, we expect crude oil prices to remain at the current high levels until the end of 2006. In the short term, even if crude oil prices drop, we expect PX prices to remain strong, supported by resilient demand, and expected tight supply as a result of new supply delays in the Middle East. This would in turn sustain raw material price for PTL. Healthy balance sheet. As at 31 Jun 2006, PTL s net gearing was 41%, while Interest Coverage Ratio (EBITDA/Interest expense) was 4.4x for the quarter. We estimate that PTL s gross margin would have to drop to 8% (which is only remotely possible; FY04-06 average: 28.3%, 4Q06: 18.2%, 1Q07: 14.5%), before the company starts to face difficulty in servicing its debt. Generally, PTL s financial status is healthy. New volume from Turkey plant insufficient to offset falling margins. The new thin film plant in Turkey started operation in Dec 2005. Utilisation was ramped up to 75% and 90% in 4QFY06 and 1QFY07, respectively. The Metallizer machine was commissioned in Mar 2006, and has started production. Despite the 49% y-o-y increase in sales volume in 1Q07, sales revenue only grew 38% y-oy, implying 6% y-o-y drop in the average selling price. On the other hand, aggregate COGS and SG&A rose 74% y-o-y, which caused operating profit to drop 83% y-o-y. Expansion projects. PTL s current ongoing expansion projects include: (i) 45,500 t.p.a. PET resin (Turkey) capacity, expected to be completed by end 2006 and improve product margins; (ii) Extrusion Coating/Lamination project (Thailand) - PTL plans to install 2 separate extrusion coating lines in 2 phases with combined capacity of 150-200m sqm. Investment cost is estimated at US$5m per line. The first line should be completed in the next 6-12 months. The project should help PTL to diversify into more value added products. PTL indicated earlier that it was considering getting into thick film production with a production capacity of 20,000 t.p.a. at an estimated investment cost of US$40m. The project is currently suspended due to unfavorable market conditions. 2 of 5
Quarterly Results Summary FY Mar (Btm) 1Q06 2Q06 3Q06 4Q06 1Q07 % chg % chg Ending 30-Jun-06 30-Sep-06 31-Dec-05 31-Mar-06 30-Jun-07 y-o-y q-o-q Total sales 751 743 742 1,063 1,038 38% -2% Cost of sales (511) (503) (532) (870) (888) 74% 2% Gross profit 240 240 210 193 150-38% -22% SGA (85) (77) (109) (150) (124) 47% -17% Optg profit 156 163 101 43 26-83% -40% Other income 25 22 15 31 19-25% -40% FX gain (loss) 13 (4) 20 4 12-2% 197% EBIT 193 182 137 78 57-71% -27% Interest expenses (0) (3) (21) (1) (21) 4455% 1868% Profit before tax 193 179 115 77 36-81% -53% Income tax - - - (5) (4) n.m. -21% Profit before minority interest 193 179 115 72 32-83% -55% Minority interest - - - 1 (2) n.m. -216% Net income 193 179 115 74 31-84% -58% Normalized profit 180 183 95 70 20-89% -71% Shares (m) 800 800 800 800 800 0% 0% Eps (Bt) 0.24 0.22 0.14 0.09 0.04-84% -58% Norm. EPS (Bt) 0.23 0.23 0.12 0.09 0.02-89% -71% EBITDA 224 214 176 131 107-52% -18% Gross Margin 32% 32% 28% 18% 14% SGA/Sales 11% 10% 15% 14% 12% Operating Margin 21% 22% 14% 4% 2% EBITDA margin 30% 29% 24% 12% 10% Net Margin 26% 24% 16% 7% 3% Source; Company, DBS Vickers 3 of 5
Summary Earnings Model (FY05-08) FY Mar (Btm) 2005A 2006A 2007F 2008F Total sales 3,263 3,300 4,322 4,581 Cost of sales (2,289) (2,416) (3,489) (3,482) Gross profit 974 884 832 1,100 SGA (319) (421) (502) (527) Optg profit 655 463 331 573 Other income 92 127 92 96 EBIT 747 590 423 669 Interest expenses (26) (26) (74) (43) Profit before tax 721 565 349 625 Income tax - (5) (4) - Profit before minority interest 721 560 345 625 Minority interest - 1 (2) - Net income 721 561 343 625 Normalized profit 704 528 331 625 Shares (m) 800 801 802 803 EPS (Bt) 0.90 0.70 0.43 0.78 Norm. EPS (Bt) 0.88 0.66 0.41 0.78 EBITDA 856 745 623 955 Gross Margin 30% 27% 19% 24% SGA/Sales 10% 13% 12% 12% Operating Margin 20% 14% 8% 13% EBITDA margin 26% 23% 14% 21% Net Margin 22% 17% 8% 14% Source; Company, DBS Vickers 4 of 5
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