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 an analyst teleconference yesterday, we reaffirm our FY19F-FY21F earnings, which are currently 2%–8% above consensus. These are the key takeaways:

• PChem’s 3QFY19 production volume dropped 21% QoQ to 2.3mil tones in tandem with the average in plant utilisation (PU) dropping to 81% from 103% in 2QFY19. This stems from turnaround activities (TA) at 6 facilities in Sabah and Kerteh – PC Fertiliser Sabah, PC Olefins, PC Glycols, PC Derivatives, PC LDPE and PC Ammonia. These TA were undertaken over 40–43 days in 3QFY19, with only the LDPE plant maintenance being completed on 2 October this year.

• As there are no scheduled TA in 4QFY19, there would be no surprises and management hopes to achieve an overall PU of 100%, similar to 2QFY19. As highlighted in our earlier updates, management expects to achieve an overall PU of over 90%, as the 9MFY19’s 93% is already above the 92% in FY18.

• We note that the group was able to achieve over 100% PU in 2QFY19, within the group’s 10% threshold above its nameplate capacity, given the gas composition of Petronas’ upstream activities.

• Management expects lower TA in FY20 as the major maintenance projects were scheduled in 2017–19. In 1QFY20, PChem has a scheduled 30-day TA for its methanol plant in Labuan.

• Maintenance expenditures, which have stabilized around RM800mil in FY18 and FY19F, is expected to be slightly lower in FY20F due to the lower TA.

• The JV losses of RM12mil (halved QoQ) are expected to reverse to profitability as the 40%-owned Aroma plant in Gebeng has reached a PU of 80% and is now EBITDA positive.

• Management’s FY20F guidance for the Pengerang Integrated Complex’s (PIC) petrochemical operations appears to be slightly more optimistic, returning to 70%-80% PU from a breakeven level of 60% as indicated in the 2QFY19 briefing. PChem expects to reach PIC production stabilisation in 1QFY20 with depreciation charges progressively rising in tandem with phased commencement schedules. This appears to be at a faster pace that management’s earlier guidance for full utilisation over 3 years. Nevertheless, management still indicates that FY20F earnings could be minimal, in line with our expectations.

• PChem currently trades at a reasonable FY20F EV/EBITDA of 9x, near its 5-year average, while its dividend yields are fair at 3%.

Source: AmInvest Research - 15 Nov 2019