Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) but with a lower fair value of RM7.80/share (from an earlier RM9.50/share) pegged to an FY20F EV/EBITDA of 8.5x.

• Our valuation has reverted to PChem’s 3-year average of 8.5x from the previous premium of 1SD amid moderating crude oil prices and softening petrochemical demand exacerbated by the US-China trade tensions.

• We have cut our FY19F–FY21F earnings by 18%–21% by lowering average product price assumptions by 5% and a 2% decline in demand growth.

• Our FY19F–21F earnings are now 12%–17% below street’s, with FY19F net profit of RM3.7bil declining by 26% YoY from its alltime record performance of RM5bil which benefited from an average crude oil price of US$71/barrel (vs. US$62/barrel currently) and commendable average plant utilisation of 92%.

• The Pengerang plant, which will increase the group’s effective annual production capacity by 15% or 1.9mil tonnes to 14.6mil tonnes, has already reached mechanical completion and is currently being commissioned progressively.

• The investigation for the April explosion and fire at the Refinery and Petrochemical Integrated Development (RAPID) project in Pengerang will be completed soon. As this does not directly affect PChem’s plant currently under construction given that the incident happened at Petronas’ refinery, management expects the full commissioning for the plant to be on track by 4QFY2019 with commercial operations and revenue contribution by early FY20F.

• Recall that back in 2017, PChem sold a 50% stake in PRPC Polymers, which has an annual capacity of 3.3mil tonnes, to Saudi Aramco for RM3.8bil (US$900mil). Separately, PChem also has a 250,000-tonne capacity isononanol plant which is being built at a cost of US$442mil in Pengerang.

• While the statutory turnaround for the aromatics plant was completed in April this year, and the MTBE plant was shut down in May, the plant maintenance schedules this year are still expected to sustain the group’s utilisation levels above 90% as compared with 92% in FY18.

• However, as crude oil prices have slid 9% currently from an average US$68/barrel in 2QFY19, we caution that the group’s product prices have a strong correlation to Brent crude oil prices amid weakening global demand for petrochemical products (See Exhibits 1–5).

• PChem currently trades at a reasonable FY20F EV/EBITDA of 8x, which is near its 3-year average of 8.5x (see Exhibit 6), while its dividend yields are fair at 3%.

Source: AmInvest Research - 22 Jul 2019