Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) with an unchanged fair value of RM9.60/share based on FY19F EV/EBITDA of 10x — 3SDs above its 3-year average of 8x given the stock’s correlation to crude oil prices.

• Our PChem’s FY18F-FY20F earnings are maintained even though 9MFY18 core net profit of RM3,847mil (excluding a 1QFY18 exceptional loss of RM153mil from the RM3.8bil disposal of a 50% equity stake in PRPC Polymers S/B to Saudi Aramco) appears to be significantly above expectations, accounting for 86% of our FY18F earnings and 93% of consensus, vs. 67%-76% for 9MFY15-FY17 against their respective years. The group did not declare any third interim dividend, as expected.

• As we indicated in our previous 2 results update, the group’s 9MFY18 results were expected to be strong given the 3QFY18 sequential increase in product prices amid largely stable plant utilisation rate of 91%, as earlier guided by management.

• On a YoY comparison, 9MFY18 revenue rose 15% due to higher product prices and commencement of Petonas Chemical Fertiliser Sabah S/B (formerly Sabah Ammonia Urea plant) in May 2017. Together with a 4ppt reduction in effective tax rate to 10%, 9MFY18 core net profit rose 21%.

• However, 4QFY18 earnings could experience a sharp drop in tandem with the recent fall in product prices together with excess capacity from the Middle East and China amid easing global demand growth expectations.

• PChem’s 3QFY18 core net profit dropped 8% QoQ to RM1,257mil mainly from plant utilisation rates falling to 79% from 95% in 2QFY18 due to turnaround activities for the methanol and ASEAN Bintulu Fertiliser plants.

• This was partly offset by higher product prices as crude oil prices rose 6% during the quarter, higher plant maintenance costs during the statutory turnaround activities and a 4ppt drop in effective tax rate to 5% due to a higher proportion of income benefiting from Labuan’s Global Incentive For Trading (GIFT) incentive.

• The group’s product prices have a strong correlation to Brent crude oil prices which have fallen by 20% since 30 September 2018 to US$66/barrel currently. Likewise, benzene has dropped by 28%, naphtha and ethylene down by 20%, methanol by 7% and polyethylene 5%. However, urea appears to be resilient, rising 10%, due to plant turnaround activities. We will provide further updates following the group’s analyst briefing later this evening.

• PChem currently trades at a pricey FY19F EV/EBITDA of 10x, which translates to a 61% premium (vs. its 3-year average premium of 30%) to Thailand’s PTT Global Chemicals’ 6.1x, while dividend yields are unassuming at 3%.

Source: AmInvest Research - 16 Nov 2018