Cyclical upturn not over yet

BUSRIN TREERAPONGPICHIT

The petrochemicals and chemicals sector is rebounding and should offer good returns for investors this year on the heels of positive results and higher dividend payments in 2007.

The highly cyclical industry -  some investors were concerned that its good times had peaked -  has been affected by skyrocketing costs for its petroleum-based feedstocks, although product prices have risen as well. The sector ranked third out of 25 sectors on the SET in 2007, with a positive one-year total shareholder return (TSR) of 69.40%.

The prices of petrochemical products are closely tied to oil price movements. The average price of crude climbed from US$60 a barrel at the start of 2007 to $100 by year-end.

Most of the SET-listed petrochemical companies reported one-year TSR above 20%, spurred by revenue growth in line with higher petrochemical product prices. Several companies maintained dividend payments to shareholders, which also helped their TSR.

Most analysts believe that prices for most petrochemical products will stay at high levels for the next year or two, driven by limited supply and high prices for the main raw material, crude oil.

The top performer in the sector was PTT Chemical (PTTCH), the country's largest olefins maker and an affiliate of the country's top oil and gas conglomerate, PTT Plc. PTTCH delivered a one-year TSR of 78.58%. With a market capitalisation of 185.55 billion baht as of Dec 31, the company ranked seventh in the overall market.

Most analysts have made PTTCH a top pick for 2008, thanks to its strong earnings potential from investments made in downstream projects.

According to research by CIMB-GK, PTTCH is expected to perform at its peak this year as it should enjoy strong volume growth in line with a 22% year-on-year rise in output, followed by a 12% gain in 2009 in line with the company's 2007-09 capacity expansion plan.

The company should also benefit from high oil prices and book better margins than its peers as it uses ethane gas as a main feedstock, said CIMB analyst Itphong Saengtubtim.

PTTCH has a long-term business plan to focus on sustainable returns via two key strategies: production cost reductions and investment diversification to downstream activities.

The PTT affiliate was followed in the one-year return table by Indorama Polymers Plc (IRP), with a TSR of 51.41%. The good performance reflected IRP's policy to maintain its focus on volume growth to benefit from scale, higher operating rates for cost control, customer relationships and diversification of revenue streams to mitigate the full impact of rising costs and the baht's appreciation.

This year, IRP's volume will rise by around 75%, derived from additional capacity from its recent acquisition in Europe of 350,000 tonnes a year to 950,000 tonnes.

Even the worst performer in the sector, the polyvinyl chloride (PVC) maker Vinythai Plc (VNT) posted a positive TSR last year. Capitalised at 930.37 million baht, VNT had a one-year TSR of 0.98%, a three-year TSR of -7.69%, a five-year TSR of 9.83%, and 10-year TSR of 18.29%.

VNT's low ranking in the sector reflected poor operating results in the first half last year, when capacity was low due to maintenance shutdowns by local producers of ethylene, a main raw material. Furthermore, ethylene prices have been pushed up by tight supplies throughout Southeast Asia in 2007.

VNT expects this year's results will be much better after its production improved by major changes last year. Belgium-based Solvay S.A. has become VNT's majority shareholder with 50%, followed by PTTCH at 24.98%.

VNT's capacity will rise this year to 330,000 tonnes, and it is also carrying out an expansion plan to lift capacity by another 70,000 tonnes of PVC. As a result, it hopes to have fully integrated annual production capacity of 400,000 tonnes by 2008 to meet growing domestic demand and strengthen its position in export markets. Vinythai is the third-largest PVC producer in Southeast Asia.

The company did see its return on equity improve to 4.1% in 2007, compared with 3% in 2006 even though the capacity expansion was not yet completed.