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 5-year average.

• Our PChem’s FY19F–FY21F earnings are maintained as the group’s 9MFY19 net profit of RM2,471mil came in within our expectations, accounting for 67% of our FY19F earnings and 69% of street’s. The group did not declare another dividend in this quarter as expected, translating to a YTD DPS of 11 sen (-3 sen YoY).

• As we have forewarned in our earlier updates, PChem’s 3QFY19 net profit halved QoQ to RM553mil from a sharp 19ppt drop in average plant utilisation rate (PU) to 81% from 100%.

• This stems from turnaround activities for the main olefin cracker plant in Terengganu and Petronas Chemical Fertiliser Sabah S/B, formerly named Sabah Ammonia Urea (Samur), plant. While this also increased maintenance costs, the impact was partly offset by a 1.3% stronger USD vs. the MYR.

• The turnaround activities for the main Terengganu cracker plant, which has a capacity of 600,000 tonnes of ethylene, and the Samur plant, have been completed in 3QFY19.

• In 4QFY19, PU is subsequently expected to rebound 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.

• On a YoY comparison, PChem’s 9MFY19 net profit fell 37% in tandem with a 16% revenue contraction due to lower average product prices despite average PU improving slightly by 2ppt to 81% and a 1% depreciation in the MYR vs. the USD.

• Crude oil prices have risen slightly by 2% to US$63/barrel since the 3QFY19 average of US$62/barrel over geopolitical tensions in the Middle East, rising expectations of further Opec quota reductions amid moderating US-China trade tensions.

• However, benzene, urea, polyethylene and paraxylene prices have fallen by 22%, 14%, 9% and polypropylene 3%. Methanol rose slightly by 5% while naphtha was flattish.

• Hence, PChem’s earnings prospects remains unexciting 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 8.5x, which is near its 5-year average, while its dividend yields are fair at 3%. We will provide further updates after the analyst briefing tomorrow.

Source: AmInvest Research - 13 Nov 2019