Investment Highlights

• We downgrade our recommendation on Petronas Chemicals Group (PChem) to SELL from HOLD with a lower fair value of RM4.00/share (from RM6.10/share previously), pegged to an FY20F EV/EBITDA of 7.7x, which represents 2 standard deviations below its 3-year average of 8.8x.

• We have halved our FY20F–FY22F earnings as we cut product price assumptions by 12% against the backdrop of declining crude oil prices exacerbated by Saudi Arabia offering substantive discounts on its key crude oil markets.

• Management may only be able to cushion the price pressure to a limited extent with higher sales volume as PChem’s FY20F plant utilisation is expected to be higher than the 92% achieved in FY19 due to lower turnaround days, with only units in Gebeng and Labuan plants scheduled to undergo 30–40 day TAs in 1Q2020 and 3QFY20 respectively.

• However, demand for olefin products has already been softened by the unresolved US-China trade war last year while the novel coronavirus pandemic disrupted supply chains in China since the beginning of this year which further depressed global economic growth prospects.

• Following the failure of the meeting last week between Opec and its allies on additional production cuts to stabilise the oil markets, Saudi Arabia has launched an aggressive oil price war targeting its rivals after Russia refused to participate in the oil cartel. Newspaper sources indicate that Saudi Arabia will produce over 11mil barrels/day next month from 10mil barrels/day currently after the current production quota agreement lapses.

• Saudi Arabia has already announced unprecedented discounts of almost 20% in key markets, apparently targeting Russia and the US shale industry as well as other higher cost producers. Hence we have lowered our 2020 crude oil price forecast to US$40– US$45 from US$60–US$65/barrel.

• PChem is now trading at an all-time low P/BV of 1.5x since its listing in 2010. When Brent crude oil price fell 15% YoY to US$26/barrel in 2016, its P/BV average was still higher at 2.2x.

• Amid petrochemical prices decreasing by 17% YoY, PChem’s FY16 net profit still rose 12% YoY to RM3.1bil due to higher sales volume underpinned by high plant utilisation rate of 96%, while benefiting from a 3-month time lag in inventory pricing. Back in 2016–2017, global economic growth prospects were still robust at 2.5%–3.1%.

• Our economist’s 2020 global growth forecast of 2.8%–3% is likely to be revised lower given the current weak sentiments. Hence we believe the current oil price collapse will have a more adverse impact on PChem compared to 2016.

• Following our earnings cut, PChem currently trades at a high FY20F EV/EBITDA of 15x vs. its 3-year average of 8.8x, while its dividend yields are unassuming at 2%.

Source: AmInvest Research - 9 Mar 2020