Investment Highlights

• We maintain our SELL recommendation on Petronas Chemicals Group (PChem) but with a higher fair value of RM4.45/share (from an earlier RM3.25), pegged to its 2-year EV/EBITDA average of 8x.

• We raise PChem’s FY20F–FY22F earnings by 14%–20% to account for higher volume and price assumptions. The group’s 1QFY20 core net profit of RM393mil was above our expectations but below consensus, accounting for 30% of our earlier FY20F earnings and 17% of street’s.

• A comparison, PChem’s 1Q accounted for 25%–31% of FY17– FY19 net profits. The group did not declare an interim first quarter dividend, as expected.

• PChem’s 1QFY19 core net profit halved YoY to RM393mil due to sharply lower product prices even though sales volume was flat with plant utilisation rate (PU) at 94% (vs. 95% in 1QFY19).

• Additionally, the group deferred turnaround activities for its Gebeng plant, which supported the olefin & derivatives (O&D) division’s plant utilisation of 100% vs. 98% in 4QFY19.

• QoQ, net profit rose 12% due to the absence of lumpy year-end operational costs and a higher output from a 6 percentagepoint (ppt) rise in its PU rate to 89% as the group had largely completed its turnaround activities for the main Terengganu cracker plant and Petronas Chemical Fertiliser Sabah S/B (formerly Sabah Ammonia Urea) in the previous quarter.

• The O&D division posted a RM17mil loss while the fertilizer and methanol (F&D) segment’s net profit rose 9% QoQ as its PU rate rose 7ppt to 90% amid lower operational and fuel costs.

• In 1Q2020, average prices fell by 19% QoQ for crude oil prices, 14% for naphtha, ethylene by 11%, paraxylene by 5%, methanol by 9% and polypropylene by 6%, mainly due to dampened Covid-19 inflicted global demand.

• However, the worst is yet to come as product prices have since fallen further with crude oil dropping by 40% from the 1Q2020 average, while naphtha sank 55%, ethylene 39%, polyethylene & methanol 16%, benzene 56%, paraxylene 40% and polypropylene 17%.

• With the precarious drop in crude oil prices, PChem’s earnings visibility remains clouded given that the group’s product prices have a high 3-year coefficient correlation of 81% to crude oil prices.

• PChem currently trades at a high FY20F EV/EBITDA of 14x vs. its 2-year average of 8x, while its dividend yields are unassuming at 2%.

Source: AmInvest Research - 21 May 2020