Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) with a lower fair value of RM6.10/share (from an earlier RM7.80/share) pegged to an FY20F EV/EBITDA of 8.3x, which is 1 standard deviation below its 3-year average of 8.8x and a 25% discount to Formosa Petrochemical.

• We cut PChem’s FY20F–FY22F by 23%–24% as the group’s FY19 core net profit of RM2,811mil underperformed expectations, coming in 21% below our forecast and 13% below consensus. The group declared a second interim dividend of 7 sen, bringing YTD DPS to a disappointing 18 sen (-44% YoY).

• As we have indicated in our update on 13 November last year, PChem’s 4QFY19 revenue rose 15% QoQ to RM4.2bil from an 8 percentage-point (ppt) increase in plant utilisation (PU) rate to 89% as the group had largely completed its turnaround activities for the main Terengganu cracker plant with a capacity of 600,000 tonnes of ethylene, and Petronas Chemical Fertiliser Sabah S/B, formerly named Sabah Ammonia Urea (Samur) plant in the previous quarter.

• However, 4QFY19 core net profit fell 37% QoQ to a surprisingly low RM350mil from a 9ppt EBITDA compression to 17%, largely due to lower product prices. We believe this could also be partly due to lumpy year-end expenditures.

• On a YoY comparison, PChem’s FY19 net profit tumbled 41% in tandem with a 16% revenue contraction which was dampened by lower average product prices in tandem with crude oil prices decreasing by an average of 10%, notwithstanding a flattish PU of 92%.

• As the olefin & derivatives PU fell 4ppt to 93% while fertilisers & methanol rose 2ppt to 91% in FY19, we believe the product mix was also unfavourable to the group’s bottom line.

• Crude oil prices have fallen by 14% to US$56/barrel since the beginning of the year from concerns over the impact of the Wuhan coronavirus (Covid-19) pandemic on global economic growth.

• Likewise, naptha has dropped by 15%, benzene by 9% and methanol by 6%. However, polyethylene, paraxylene and polypropylene were flattish while urea rose 10% instead.

• For now, 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 slightly high FY20F EV/EBITDA of 9x, above its 3-year average of 8.5x, while its dividend yields are unassuming at 3%. We will provide further updates after the analyst briefing tomorrow.

Source: AmInvest Research - 26 Feb 2020