Investment Highlights

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

• Our PChem’s FY19F-FY21F are maintained amid an unchanged 2019F oil price expectation of US$65-70/barrel as the group’s 1HFY19 net profit of RM1,708mil came in within our expectations, accounting for 46% of our FY19F earnings and 43% of street’s RM3,989mil. The group’s first dividend of 11 sen was also within our expectations, accounting for 46% of our FY19F assumption.

• As we have guided in our update on 26 July, PChem’s 2QFY19 net profit was stronger sequentially, rising by 40% QoQ to RM1,120mil from a 5ppt improvement in average plant utilisation rate (PU) to 100% due to lower maintenance activities and a slight 1% depreciation of the MYR vs. the USD despite softer average product prices which were dampened by oversupply and weak demand.

• Its 2QFY19 revenue rose by 5% QoQ while EBITDA surged by 25% QoQ, which drove EBITDA margin up by 6ppts to 38% that was largely driven by the fertiliser and methanol segment.

• On a YoY comparison, PChem’s 1HFY19 net profit fell 34% in tandem with a 13% revenue contraction which was dampened by lower average product pries despite average PU improving slightly by 1ppt to 99% and a 2% depreciation in the MYR vs. the USD. The lower 1HFY19 revenue was also exacerbated by lower sales volume despite higher PU as the previous period benefited from higher inventory drawdowns.

• However, the group's 3QFY19 average PU could subsequently drop from 100% in 2QFY19 to below 80% 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, 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.

• Crude oil prices have dropped by 15% since the 2QFY9 average of US$68/barrel over the exacerbating US-China trade war tensions and weakening global economic prospects. Likewise, polyethylene, methanol and paraxlene prices have fallen by 9%, ethylene 7% and polypropylene 5%. Hence, PChem’s earnings visibility remains clouded given that the group’s product prices have a strong correlation to crude oil prices. PChem currently trades at a reasonable FY20F EV/EBITDA of 9x, which is near its 5-year average, while its dividend yields are fair at 3%.

Source: AmInvest Research - 13 Aug 2019