Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) with unchanged forecasts and fair value of RM7.80/share pegged to an FY20F EV/EBITDA of 8.5x, which represents its 3-year average.

• Following our recent company visit, we expect the group’s 2QFY19 results, expected to be announced on 13 August, to be stronger on a quarterly comparison notwithstanding the current softness in olefin prices. This stems from minimal 2QFY19 turnaround and maintenance activities which could mean that the group’s plant utilisation (PU) rates could remain above 90%, similar to 95% registered in 1QFY19.

• This is further underpinned by average crude oil prices rising 8% QoQ from US$64/barrel to US$68/barrel in 2QFY19 notwithstanding generally mixed price movements for ethylene (- 12%) and polyethylene (-2%) vs benzene (+14%), polypropylene (+2%) and urea (+2%).

• However, the group’s 3QFY19 average PU could subsequently drop below 80% (vs 79% in 3QFY18) due to turnaround activities for the main olefin cracker plant in Terengganu and Petronas Chemical Fertiliser Sabah S/B, formerly named Sabah Ammonia Urea (SAMUR) plant. The turnaround activities for the main cracker plant, which has a capacity of 600,000 tonnes of ethylene and 900,000 tonnes of propylene, could last 40–60 days while the ongoing maintenance schedule for the SAMUR plant could range 30–40 days.

• However, PU is subsequently expected to rebound in 4QFY19 in the absence of substantive maintenance activities, which should enable the group to achieve its targeted utilisation levels of above 90%, similar to 92% in FY18.

• Global Data has projected global petrochemical capacity to grow by 35% to 2,134mil tonnes p.a. in 2030 with 1,320 planned and announced plants primarily in Asia and the Middle East (See Exhibit 9). The IEA estimates that the US could add 8mil tonnes annually by next year while China plans to add 21 steam crackers and 10 refinery parks under its Belt and Road Initiative, which translates to 27mil tonnes of new ethylene production by mid- 2020s, and reach over 42mil tonnes. However, we do not discount the possibilities of project deferrals given that these capacity expansions have long gestation time lines amid uncertain global demand.

• While crude oil prices are currently flattish vs. 1QFY19, visibility remains clouded given its inherent volatility exacerbated by geopolitical tensions and economic growth concerns. We caution that the group’s product prices have a strong correlation to crude oil prices.

• 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 - 26 Jul 2019