Investment Highlights

• We maintain our BUY recommendation on Petronas Chemicals Group (PChem) but with a lower fair value of RM7.05/share (from an earlier RM7.70/share), pegged to a higher FY21F EV/EBITDA of 10x, 1 standard deviation above its 2-year EV/EBITDA average of 8.5x.
• We have cut PChem’s FY20F–FY22F earnings by 15%–24% to account for a 5% drop in average product price assumptions. The group’s 1HFY20 core net profit of RM692mil (-60% YoY) came in below expectations, accounting for 35% of our FY20F earnings and 38% of street’s.
• As comparison, PChem’s 1H accounted for 52%–59% of FY17– FY19 net profits. Given the lower earnings, the group’s interim dividend of 5 sen represents a 6 sen reduction YoY.
• YoY, the group’s 1HFY20 net profit fell 60% on lower product prices, further exacerbated by average plant utilisation decreasing slightly to 97% from 99% with the completion of turnaround activities for the main Terengganu cracker plant and Petronas Chemical Fertiliser Sabah S/B in late 2019.
• PChem’s 2QFY19 core net profit’s 63% slump QoQ to RM186mil was due to sharply lower product prices even though its sales volume was higher with the plant utilisation rate at 100% (vs. 94% in 1QFY20).
• The olefin & derivatives division registered a 2QFY20 net profit of RM32mil vs. a loss of RM17mil earlier due to an EBITDA reclassification of RM88mil from the fertiliser and methanol (F&M) segment. This also partly contributed to the F&M’s net profit contraction of 45% QoQ to RM198mil.
• PChem’s overall weaker earnings are in tandem with product price trends in 2Q2020 as crude oil prices fell 37% QoQ, naphtha 43%, ethylene 21%, polypropylene 12%, benzene 53%, paraxylene 35% and methanol 19% due to Covid-19-inflicted global demand.
• However, since April this year, product prices have risen with crude oil climbing 83% to US$45/barrel, naphtha up 2.2x, benzene 2.1x, ethylene 41% and polyethylene 16%, albeit some continuing softness in paraxylene, urea and methanol.
• With the upturn in crude oil prices, PChem’s earnings visibility has improved given that the group’s product prices have a high 3-year coefficient correlation of 81% to crude oil prices. Additionally, the discount to the 5-year average polyethylenenaphtha spread has narrowed to 19% from 31% in early June this year (See Exhibit 8).
• PChem currently trades at a fair FY21F EV/EBITDA of 8.4x vs. its 2-year average of 8.5x, while its dividend yields are attractive at 3% against the current low interest rate regime.

Source: AmInvest Research - 19 Aug 2020