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 the analyst briefing yesterday, we came away with the impression that the group remains cautious on PChem’s 2HF earnings prospects. These are the key takeaways from the teleconference:

• PChem’s average olefins and derivatives (O&D) prices fell 5% QoQ and 18% YoY while fertiliser and methanol (F&M) rose slightly by 1%.

• 2QFY19 average plant utilisation (PU) at 103% was actually higher than the 100% reported in the notes to the quarterly accounts with O&D sliding slightly by 3ppts QoQ to 97% while F&M surged by 15ppts QoQ to 107%, driving up methanol production volume by 59% and urea by 5%.

• This level is within the group’s 10% threshold above its nameplate capacity albeit uncertain given the gas composition of Petronas’ upstream activities.

• The group’s 2QFY19 EBITDA outpaced revenue by RM123mil largely due to the absence of lumpy manpower costs/performance bonus.

• 2QFY19 ethylene inventory was built up to partly mitigate the expected turnaround activities in 3QFY19, which led to 1HFY19 sales volume declining by 5% YoY. Nevertheless, inventory costs slid 5% YoY given the lower composition of raw materials to finished products.

• The group's 3QFY19 average PU could subsequently drop to below 80% due to turnaround activities for the main Terengganu olefin cracker plant, which could last 50 days while the ongoing maintenance schedule for the Samur plant ranges 30-40 days. Overall, management expects FY19F production volume to be flattish YoY with PU of over 90%.

• Management appears to be lowering FY20F expectations for contributions from the Petrochemical Integrated Complex (PIC) in Pengerang, with plant utilisation lowered from 70%- 80% to a breakeven level of 60% which is expected to generate single-digit EBITDA margin. With the PIC now expected to reach full utilisation over 3 years, we view the assumptions for our FY19F–21F earnings, which are 7%–13% below consensus, as largely intact.

• While the US-China trade war could improve PChem’s sales volume given that almost 50% of the group’s sales stems from China, the accompanying price decline is likely to have a net negative earnings impact.

• 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 - 14 Aug 2019