Investment Highlights

• We upgrade our recommendation on Petronas Chemicals Group (PChem) to BUY from SELL with a higher fair value of RM7.70/share (from an earlier RM4.45), pegged to a rolled forward FY21F EV/EBITDA of 9x, 1 standard deviation above its 2-year EV/EBITDA average of 8x.

• We raise PChem’s FY20F–FY22F earnings by 30%–33% on a 5%-20% increase in our product price assumptions in tandem with the recent upturn in oil prices.

• While 2QFY20 results is likely to drop QoQ due to likely lower average oil prices and the time lag impact on chemical prices vs. crude oil, we believe that investors are now looking ahead to FY21F earnings outlook with the moderation in the impact of Covid-19 demand destruction.

• Over the weekend, Opec+ decided to extend production quotas at almost the same level for another month instead of tapering them as planned by the end of June this year.

• Together with China’s crude demand rebounding to 13mil barrels/day in May this year, Saudi Arabia has substantively raised prices for crude exports, the highest increase over 20 years.

• Saudi Aramco raised Arab Light to Asia by an average US$6.10/barrel to a premium of 20 US cents over the benchmark, with all July grades to Asia by between US$5.60 and US$7.30/barrel. As a comparison, a Bloomberg survey of traders indicates an earlier expectation for an average increase of US$4/barrel.

• Saudi Arabia sells its crude at a differential to oil benchmarks by announcing the discount or premium charged to global refiners every month. These official selling prices set the direction in the physical oil market.

• This has spurred Brent oil prices over the threshold US$40/barrel to US$43/barrel currently vs. future prices that had astonishingly fell to negative US$38/barrel on 20 April this year. Overall, the increases for Saudi crude erased almost all of the discounts that were made during the price war with Russia which started briefly in March this year.

• With the upturn in crude oil prices, PChem’s earnings visibility has been restored 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 low FY21F EV/EBITDA of 7.6x vs. its 2-year average of 8x, while its dividend yields are attractive at 3% vs. the current low interest rate regime.

Source: AmInvest Research - 9 Jun 2020