Further upside this year on the back of rising gas demand and improving petrochemical businesses 

We came out of the analyst meeting with PTT Plc. (PTT) last Friday feeling quite upbeat on the company's earnings prospects for this year.

The key earnings drivers this year will be growth in gas demand and a significant improvement in PTT's refinery and petrochemical businesses. With rising crude oil prices, PTT's affiliated refineries should benefit from both higher revenues and widening gross refinery margins (GRM).

PTT benefits from very strong cash flow, estimated last year at Bt30,035mn or Bt10.74/share. This should be sufficient to largely finance PTT's capex budget of Bt104,918mn (2003-2006) while maintaining dividends of Bt2.85 each year.

The current share price is really cheap, trading at 2003 PER of only 4.9x, EV/EBITDA of 3.8x. The stock offers an upside of 22% to our fair value estimated of Bt52.50. With an earnings growth and attractive dividend yield of 6.7%, we reiterate our BUY recommendation.

Earnings Summary
	2000	2001	2002	2003F
Sales (Bt mn)	371,455	377,902	399,752	412,945
EBITDA (Bt mn)	40,757	49,840	57,545	57,924
Normalized earinings (Btmn)	14,714	18,551	24,039	25,637
Earnings (Btmn)	12,280	21,565	24,507	25,637
EPS (Bt)	4.4	7.7	8.8	9.2
PER (x)	9.7	5.5	4.9	4.7
EV/EBITDA	5.8	4.2	3.8	3.6
Free cash flow (Btmn)	(180)	(26,250)	20,183	15,037
CF/share (Bt)	6.7	7.5	10.7	12.0
Book value per share (Bt)	10.9	20.7	29.0	35.7
DPS (Bt)	-	2.5	2.85	3.0
Dividend yield (%)	-	5.8	6.7	7.0

• PTT's gas sales volume rose 8% last year to an average of 2,475 million cubic feet per day (mmcfd). In 4Q02, sales volume surged 11% yoy to 2,456mmcfd due to rising electricity consumption. In January, electricity peak demand increased 8.3% yoy, higher than the projected 6% growth rate. Approximately 80% of PTT‘s gas sales go to the power sector, particularly EGAT, IPPs and SPPs. Most of the growth in sales this year will be to RATCH, which should be operating at full capacity after bringing its last unit on line in 4Q02.

• Rising LPG prices are another positive factor for PTT. Due to the increase in world oil prices, LPG prices have surged 48% from last year's average of $243/tonne to the current $360/tonne. The management expects LPG prices could average $360/tonne for the full year. If the assumption proves true, it would add revenues of around Bt7.5bn to the company.

• Make-up gas sales should help boost PTT's sales and cash flow this year. The company took delivery of $58mn of make-up gas last year, but has made total advance payments of about $772mn under its take-or-pay contracts with the Yetagun and Yadana producers. PTT plans to receive make-up gas of around $100mn each year until 2009.

• PTT‘s oil marketing margin averaged Bt1.25/litre in 2002, the best margin over the last five years. The management expects its marketing margin could be maintained around Bt1.20/litre this year following increase in crude oil prices.

• PTT's affiliated refineries have benefited from the recent increase in crude prices. Gross refinery margin (GRM) currently stand at $5/barrel mainly due to retail oil prices rising faster than crude oil prices. Last year, Thai refineries achieved average GRM of $3/barrel. According to PTT‘s management, refineries need to achieve GRM of not less than $3/barrel to remain profitable. Also, if crude oil prices start declining, refineries will not only face shrinking margins but will have to book losses on inventories.

• PTT currently holds a 63% equity stake in Thai Olefins (TOC) after injecting fresh capital into the company last year. TOC, which has ethylene and propylene capacity of 385,000 and 190,000tonnes/year, respectively, is another turnaround story. Ethylene and propylene prices have risen by 66% and 33% from the 4Q02 to the current of $680 and $690/tonne respectively. In the longer term, TOC will be in a position to contribute more to PTT after expanding its ethylene production capacity by 315,000tonnes/year in 4Q04.

• PTT‘s is currently planning its $280mn investment in a 5^th gas separation plant and Bt1.8bn investment in the 3^rd offshore pipeline. The first phase of this project is scheduled to start commercial operation in 2005 and 2006. PTT has budgeted capex totaling Bt104,918mn for 2003-2006. With cash flow of operations of approximately Bt30bn per year, we believe PTT can use its internal cash flow to finance these major projects without raising its gearing ratio.