Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) with unchanged forecasts and 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.

• These are the salient highlights from the analyst briefing on 16 November 2018:

• The group undertook turnaround activities at 4 facilities – ethylene, polyethylene and fertiliser in Kedah and Labuan’s methanol plant 2 in 3QFY18, which caused the expected plant utilisation drop to 79% from 94% in 2QFY18.

• Another turnaround is scheduled for the Bintulu urea plant in 4QFY18, which should translate to an overall plant FY18F utilisation rate of over 90% – comparable to 91% in 9MFY18 and FY17.

• While a second cracker is scheduled for a statutory turnaround and the Sabah ammonia and urea plant to undergo a 1-month warranty shutdown in 2HFY19, overall FY19F plant utilisation rate is likewise expected to be above 90%.

• Effective tax rate is still expected to range 10%–12%, supported by Labuan’s Global Incentive For Trading (GIFT) incentive, as the even lower 5% registered in 3QFY18 benefited from one-off prior year adjustments.

• Even though China’s chemical tariffs, imposed last month, are skewed against US imports and should be favourable to Malaysian manufacturers, PChem expects to maintain volumes earmarked to the country as market prices could be more attractive elsewhere.

• With PChem’s facilities in Pengerang reaching a completion stage of 89% vs. the Pengerang Integrated Complex’s 91%, commercial commencement is still expected by early 2019. However, substantive contribution will only materialise 2HFY2019 when production can reach a stable running rate.

• Even though its parent Petronas will be paying a special dividend of RM30bil next year, PChem’s dividend policy of 50% of net profit will not be affected.

• We remain cautious on PChem’s near-term outlook given the recent drop in crude oil prices, which have fallen by 20% since 30 September 2018 to US$66/barrel currently, dragging down benzene by 28%, naphtha and ethylene by 20%, methanol by 7% and polyethylene 5%.

• 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 - 19 Nov 2018