Is PTT’s Strategy to Become a Multi-Industry Conglomerate the Right Move?
Highlights:
- Expansion to other industries as oil business matures
- Natural gas as transition fuel drives PTT’s organic growth
- Attractive dividend yield despite rise in invested capital
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PTT’s revenue breakdown 2021
Volatile price, but volume could help to turnaround
- Over the past year, the stock price has been highly volatile
- Most recently, the 50 DMA stayed below the 200 DMA, which is a bearish signal
- However, both lines moved close together since early this year
- The Volume RSI has stayed slightly above the 50%-line, which is a positive sign
Expansion to other industries as oil business matures
- In its new strategic alignment, management aims to tap into further industries to escape growth stagnation
- This includes pharmaceuticals, nutrition, medical technology, AI, robotics, cloud service provider, infrastructure, batteries for electric vehicles, and many more
- The company will allocate 32% of its future CAPEX budget until 2030 to invest in new industries, mainly through M&A
Diversifying business lines sounds great, but is there any downside?
- The advantage of focusing on one single segment is that a company allocates all resources to maximize the return out of that business
- In case of multiple business lines, investors are exposed to industries in which they might not want to invest
- Investors can diversify themselves by simply adding stocks of other companies to their portfolio
- This is why conglomerates usually trade at a discount
Transition from mature to growth company requires high CAPEX
- In the context of its aggressive expansion plan, I expect a massive ramp-up of CAPEX
- Between 2016 and 2018, CAPEX/depreciation was below 1x, highlighting its past maturity status
- The ratio could grow to 1.5x by 22E, reflecting its attempt to reach high growth again
Natural gas as transition fuel drives PTT’s organic growth
- PTT continues to expand its natural gas production which already contributed 21% in 2021 (vs. 14% in 2014)
- Natural gas is likely to stay the dominant fuel in Thailand over the medium term
- Demand for natural gas sees a continuous growth of 2%
- PTT plans to add a 6th gas pipeline and build a second LNG (liquefied natural gas) terminal during 2022
PTT also aims to become a dominant player in renewable energy
- In 2021, PTT entered the renewable energy market with a capacity of 200MW
- This equals around 1.3% of Thailand’s total renewable energy capacity (15,000 MW)
- The company plans to allocate 15% of its CAPEX budget to expand its existing capacity to 12,000MW by 2030
- The target might be a bit ambitious
- Also, I expect the margin from this business to be lower than gas and oil
Attractive dividend yield despite rise in invested capital
- With exception in 2020, PTT was able to create value for its shareholders
- I expect PTT to return to an ROIC of 10% in 21E
- However, ROIC is likely to decline over time, as invested capital heavily increase
- Dividend yield is attractive and could reach a comfortable 5%+ in 22E
FVMR Scorecard – PTT
- A stock’s attractiveness relative to stocks in that country or region
- Attractiveness is based on four elements
- Fundamentals, Valuation, Momentum, and Risk (FVMR)
- Scale from 1 (Best) to 10 (Worst)
Analysts are pessimistic about the company’s outlook
- Analysts’ consensus is bullish with 90% of analysts issuing a BUY recommendation
- Currently there is only 1 BUY recommendation
- 7 analysts recommend to HOLD, with another 8 recommending to SELL
- Consensus expects strong revenue prospects over the next 3 years
- Also, operating margin should return to pre-pandemic levels
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P&L – PTT
- Strong bottom-line mainly driven by heightened demand
Balance sheet – PTT
- PTT is a capital-intensive business, with more than 57% of total assets being net fixed assets
- The global average is around 33%
- Its aggressive expansion plan requires the issuance of further capital, likely debt
- Being state-owned, I don’t expect PTT to struggle raising capital
Ratios – PTT
- Given its capital-intensive nature, efficiency is likely to stay below 100%
- Gross margin in 21E and 22E on a record level, but it might be difficult to maintain a gross margin above 15% over time
Long-term share price performance potential
Free cash flow – PTT
- I expect rising CAPEX in line with its strategy to realize further growth by investing in other industries
Value estimate – PTT
- My revenue and margin forecast is roughly in line with analyst’s consensus
- Engaging in new industry lines and M&A could justify a terminal growth rate of 4%
World Class Benchmarking Scorecard – PTT
- Identifies a company’s competitive position relative to global peers
- Combined, composite rank of profitability and growth, called “Profitable Growth”
- Scale from 1 (Best) to 10 (Worst)
Key risk is fluctuations in oil price
- Depleting gas reserves in questions longevity of its gas business
- Engaging in new industries might be a risky move (e.g. overpaying acquisitions; inefficiency in integration)
- Volatile commodity prices could pressure margin
Conclusions
- Growing gas business and renewables drive organic growth
- PTT’s expansion to other industries could be still value accretive
- Attractive dividend yields despite growing CAPEX requirements
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