Investment Highlights

• We maintain our BUY recommendation on Petronas Chemicals Group (PChem) with unchanged forecasts and fair value of RM10.40/share based on an unchanged FY19F EV/EBITDA of 10x — 3SDs above its 3-year average of 8x given the stock’s correlation to crude oil prices.

• We remain positive on PChem’s earnings prospects following an analyst briefing yesterday. These are the salient highlights:

• Management guided that the group’s FY19F average plant utilisation (PU) rate will remain above 90%, as commendably delivered in FY16-FY18.

• FY18 PU rose 3 ppts YoY to 97% for the olefins and derivatives segment while sliding slightly by 1 ppt YoY to 89% for the fertilizer and methanol division due to turnaround activities (TA) at the Asean Bintulu Ferliser plant in October 2018.

• PChem will undergo 5 major TA activities, which will be spread out over 1QFY19 and 3QFY19, as compared with 6 in FY18.

• The group’s 4QFY18 production rose 5% QoQ to a 2,684 tonnes, which implies that its average product prices declined by 12%. This is roughly a drop of 11% in average crude oil prices during the quarter.

• The group’s 50%-owned Pengerang Integrated Complex has reached mechanical completion of 96% with production expected to commence towards the later parts of 2HFY19.

• Management expects minimal contributions this year, with plant utilization around 70% for the first 3–6 months which will progressively ramp up to 90% over a time frame yet to be confirmed due to the complexity and integration required with Petronas’ refinery.

• Management is still guiding for PChem’s effective tax rate (ETR) at 12%–15% vs. 10.5% in FY18, which benefited from investment tax allowances for the new Petronas Chemicals Fertiliser Sabah, which commenced operation in May 2017. The overall ETR remains low due to the group realigning its profitable marketing operations to Labuan’s Global Incentive for Trading regime.

• Even though management’s market guidance for 1QFY19 appears bearish, we remain sanguine given that the group’s product prices have a strong correlation to Brent crude oil prices which have risen by 28% since 31 September 2018 to almost US$67/barrel currently. Likewise, naphtha has risen by 18%, benzene 14%, paraxylene 9% and ethylene 7%.

• PChem currently trades at a reasonable FY19F EV/EBITDA of 9x, which translates to a 27% discount (vs. its 3-year average discount of 17%) to Taiwan-based Formosa Petrochemicals’ premium 12.3x, while its dividend yields are fair at 4%.

Source: AmInvest Research - 26 Feb 2019