Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) with unchanged forecasts and fair value of RM6.10/share pegged to an FY20F EV/EBITDA of 8.3x, which represents 1 standard deviation below its 3-year average of 8.8x.

• We maintain our forecasts following a teleconference briefing to investors yesterday. These are the key takeaways:

• PChem’s 4QFY19 plant utilisation rebounded 8 percentage points (ppt) QoQ to 89% with the completion of 6 turnaround activities (TAs) in Sabah and Kerteh – PC Fertiliser Sabah, PC Olefins, PV Glycols, PC Derivatives, PC LDPE and PC Ammonia – mostly in 3QFY19. This drove production volume up by 9%, which together with carried forward inventory from 3QFY19, boosted the group’s 4QFY19 revenue by 15% QoQ.

• The higher cost inventory, which was manufactured by the olefin and derivatives segment in 3QFY19, together with 4Q2019 product price contraction on lower demand caused a 10ppt QoQ contraction in the group’s 4QFY19 EBITDA margin to 30%.

• Management indicated that this higher cost from carried forward inventory accounted for 9%–10% of the group’s 4QFY19 cost of sales. Including a RM31mil stock write-down from lower product prices and RM72mil forex loss, PChem’s 4QFY19 net profit fell 39% QoQ to RM340mil.

• For the fertiliser and methanol division, which underwent only 1 TA in 3QFY19, the main reason for a 6ppt QoQ EBITDA contraction in 4QFY19 stemmed from lower average unit selling price.

• FY19 average plant utilisation (PU) was flattish YoY at 92%, undergoing 6 plant TAs with similar production volume of 10.4mil tonnes.

• With a flattish product price outlook over the next 3 months, management expects FY20F PU to be higher than 92% due to low turnaround days, with only units in Gebeng and Labuan plants scheduled to undergo 30–40 day TAs in 1Q2020 and 3QFY20 respectively.

• While China accounts for 18% of PChem’s sales volume and 15% of revenue in FY19, management has not experienced any order cancellation or delivery delays due to the Wuhan coronavirus (Covid-19) disruption so far. Should the need arise, PChem indicated that these sales can be redirected to other Asian Pacific regions.

• The group’s 50%-owned petrochemical operation in the Pengerang Integrated Complex is expected to achieve EBITDA breakeven in 2H2020 when the plant reaches full operation amid low polyethylene-naphtha spread currently.

• PChem currently trades at a fair FY20F EV/EBITDA of 8x, which is slightly below its 3-year average, while its dividend yields are unassuming at 3%.

Source: AmInvest Research - 28 Feb 2020