Highlights

Petronas Chemicals Group Berhad - Resilient Earnings Driven by High Asset Reliability

Date: 14/08/2019

Source  :  MIDF
Stock  :  PCHEM       Price Target  :  8.77      |      Price Call  :  BUY
        Last Price  :  6.93      |      Upside/Downside  :  +1.84 (26.55%)
 


INVESTMENT HIGHLIGHTS

  • Petronas Chemicals Group Bhd’s (PChem) 2QFY19 earnings contracted by -18.4%yoy to RM1,120m
  • 2QFY19 PUR sustained at 100% due to good feedstock and asset reliability
  • Product volume increased by +8.0%yoy to 2,913MT in 2QFY19
  • Average product prices declined on lower global crude oil prices however; offset by weaker Ringgit
  • Maintain BUY with an unchanged TP of RM8.77 per share

Sustained PUR at 100% despite turnaround activities. PChems’ 2QFY19 earnings contracted by -18.4%yoy to RM1,120m. The weaker earning and sales figures are expected as a result of: (i) lower average selling prices (ASP) due to lower crude oil price and; (ii) softer market demand. That said, production volume remained resilient with an increase of +8.0%yoy to 2,913MT in 2QFY19 compared with 2,689MT in 2QFY18.

Earnings within expectations. 2QFY19 core earning of RM1,922m came in within ours and consensus expectations at 47% and 48% of FY19 full year earnings estimates respectively. We are expecting PChem’s earnings to be weaker in 3QFY19 due to heavy TA undertaken during the quarter. Meanwhile, we opine that 4QFY19’s earnings will rebound with the absence of planned TA during the quarter.

Olefins & derivatives. 2QFY19 segment revenue and profit contracted by -14.7%yoy and -40.4%yoy respectively. Segment PUR was at 97% while average product prices declined by -5.0% in-line with softer crude oil prices. Ethylene production for the quarter was at 270kMT or +16.4%yoy).

Fertilisers & Methanol. Both segment revenue and profit declined marginally by -1.3%yoy and by -6.4%yoy mainly due to higher production and good plant reliability at 100%. Urea production was at 693kMT (+6.1%yoy) while methanol production was at the highest ever quarterly production at 626kMT (-13%yoy) mainly contributed by PC Fertiliser Sabah which registered its first full-year contribution in FY18 since it began commissioning in May 2017.

Impact on earnings. No changes made to earnings estimates.

Remain sanguine on company. We remain sanguine on the company given the stable outlook for its chemical products – with the gradual recovery in product spread expected to continue for the rest of the year and; resilient global demand which has so far remained intact despite the volatility caused by the ongoing US-China trade tensions. Furthermore, demand for chemical products is expected to be cushioned by numerous TA activities that will take place across the globe. According to Bloomberg, it is estimated that about 26 oil refineries are scheduled for shutdown throughout the year for expansion and/or maintenance works.

In addition, despite another round of heavy TA this year; Management still expects total product volume output to be above 10kMT, comparable with that of FY18. In addition, management also expects profits to be on par with FY18 premised on stable demand, strong asset reliability and favourable crude oil price.

Recommendation. We are maintaining our BUY recommendation with an unchanged target price of RM8.77 per share. Our target price is derived from an unchanged PER20 of 16x pegged to EPS20 of 54.8sen.

Current share price presents a strong buying opportunity. We reiterate our view that the current share price of PChem presents an opportunity to accumulate as we opine that the recent weakness in its share price is overdone given the resilient earnings performance of PChem. As mentioned in our recently published update report dated 9th August 2019 titled Not all is gloom and doom; we continue to like PChem due to its: (i) robust balance sheet; (ii) clear growth strategy; (iii) wide range of chemical offerings; (iv) favourable feedstock price from its parent company Petroliam Nasional Berhad (PETRONAS) and; (v) attractive FY20F dividend yield of 5.1%.Furthermore, PChem is also currently trading at 13.2x FY20F PER which is below its 5-year average PER of 16x which makes it an attractive stock to accumulate. Historically, it has traded up to 19.3x PER.

Source: MIDF Research - 14 Aug 2019

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