Investment Highlights

• We downgrade our recommendation on Petronas Chemicals Group (PChem) to HOLD from BUY with a lower fair value of RM9.50/share (from an earlier RM10.40/share) based on an unchanged FY20F EV/EBITDA of 9x — 1SD above its 5-year average of 8.2x against a backdrop of crude oil prices stabilising between US$65 and US$70/barrel.

• We cut our PChem’s FY19F–FY21F earnings by 10%–13% on lower production volume assumptions as the group’s 1QFY19 net profit of RM802mil came in below expectations, accounting for 15%–18% above our and consensus FY19F earnings. The group did not declare any interim dividend, as expected.

• The earnings disappointment stems from the group’s 1QFY19 average plant utilisation rate dropping 5ppts YoY to 95% due to maintenance activities at the methanol plant and statutory turnaround at the aromatics operations, which caused sales volume to drop by 14% YoY while its average product prices declined in tandem with average crude oil prices decreasing by 6% YoY.

• PChem’s 1QFY19 revenue slid 18% QoQ to RM4,130mil mainly from lower average product prices and sales volume for methanol and the aromatics segment, even though average plant utilisation rose by 1ppt QoQ to 95%.

• Together with associate losses of RM24mil from 40%-owned BASF Petronas Chemicals due to statutory turnaround activities, partly offset by a 3ppt decrease in effective tax rate to 9%, which benefits from Labuan’s Global Incentive For Trading (GIFT) incentive, 1QFY19 net profit tumbled 38% QoQ. Likewise, on a YoY comparison, 1QFY19 revenue dropped 17% which mainly contributed to the 34% decline in net profit.

• The statutory turnaround for the aromatics plant was completed in April this year, while the MTBE plant was shut down this month. Nevertheless, we understand that the plant maintenance schedules this year will maintain the group’s utilisation levels above 90% as compared with 92% in FY18.

• We are positive on the group’s plan to acquire Netherlandsbased Da Vinci Group BV for €163mil (RM762mil) cash from a group of investors including Bencis Capital Partners, which is part of the group’s strategy to expand its specialty chemicals’ current share of 5%–6% to group EBITDA.

• With crude oil prices stabilising at current levels, the group’s product prices have a strong correlation to Brent crude oil prices which have climbed by 9%–15% since 31 March 2019 to almost US$69/barrel currently

• PChem currently trades at a reasonable FY19F EV/EBITDA of 9x, which is near its 5-year average, while its dividend yields are fair at 4%.

Source: AmInvest Research - 24 May 2019