Investment Highlights

• We maintain our BUY recommendation on Petronas Chemicals Group (PChem) with an unchanged 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.

• Online media reported that an explosion and fire occurred at the Petronas' Refinery and Petrochemical Integrated Development (RAPID) project in Pengerang today. The blast, which appears to stem from a leaking gas tank, was loud enough to be heard within a 50km radius of the project. So far, two persons have been reported to be injured in the incident.

• Recall that the group’s 50%-owned Pengerang petrochemical division has reached mechanical completion of 96% with production expected to commence towards the later parts of 2HFY19. Back in 2017, PChem has sold a 50% stake in PRPC Polymers to Saudi Aramco for RM3.8bil (US$900mil).

• Given Petronas' strict adherence to health, safety and environment requirements, we expect an extensive investigation into the causes of this incident, which could delay the commencement of petrochemical production.

• 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.

• Likewise, our FY19F forecasts have not incorporated any increase in PChem’s output given that the group has guided that average plant utilization could remain flattish above 90%, similar to FY16–FY18. This is supported by 5 major TA activities this year, which will be spread out over 1QFY19 and 3QFY19, as compared with 6 in FY18.

• However, if the RAPID investigations defer production next year, we expect a 6-month delay to cause PChem’s FY20F earnings to slightly decline by 3%, assuming product prices are stable. For now, we maintain our forecasts pending further clarity from management.

• Even though management’s market guidance for 1QFY19 was bearish, we remain sanguine given that the group’s product prices have a strong correlation to Brent crude oil prices which have risen by 37% since 31 Dec 2018 to US$71/barrel currently.

• This will be a greater impact to the group than temporary delays in RAPID commencement as a 1% increase in average product prices will translate to a higher 3% rise in net profit.

• PChem currently trades at a reasonable FY19F EV/EBITDA of 9x, which translates to a 26% discount (vs. its 3-year average discount of 17%) to Taiwan-based Formosa Petrochemicals’ premium 12x, while its dividend yields are fair at 4%.

Source: AmInvest Research - 12 Apr 2019