Investment Highlights

• We maintain our BUY recommendation on Petronas Chemicals Group (PChem) with unchanged forecasts and fair value of RM7.05/share, pegged to a FY21F EV/EBITDA of 10x, 1 standard deviation above its 2-year EV/EBITDA average of 8.5x.
• Our forecasts marginally adjusted following the analyst briefing on Wednesday. These are the salient highlights:
• The group’s plant utilisation rate (PU) is expected to be in the mid-90% level as the deferral of turnaround activities for the Gebeng plant in 1Q20 to 4QFY20 could slightly moderate PChem’s operations. PChem registered an impressive 97% in 1H20 and 100% in 2QFY20 due to lower plant maintenance activities. The strong 2QFY20 PU stems from the fertilizer and methanol operations reaching 101%, offsetting the olefin and derivatives segment’ slightly lower 98%.
• Management expects to ramp up production to mitigate the 28- day operation shutdown of its Labuan plant 2, which has an annual capacity of 1.6 million tonnes, due to a landslide which affected its gas feed in July this year. This also affected the gas pipeline to Sabah Ammonia Urea plant in Sipitang.
• For FY21F, the group still expected PU levels of over 90% with 4 minor turnaround activities scheduled for methanol plants in Labuan and Gebeng as well as Asean Bintulu Fertilizer and Petronas Fertilizer Kedah.
• The group’s effective tax rate surged 23ppt to 36% due to: i) lower contribution from its Labuan marketing division, which has low tariff of 3%; ii) non-offsetting losses from divisions in MTBE, paraxylene and benzene; and iii) non-deductible expenses. For FY20F, management expect effective tax rate around 15%–20% vs. our unchanged assumption of 15%.
• The 50%-owned Pengerang Integrated Complex (PIC) petrochemical operations, which were expected to progressively begin in 2H20, have been deferred to 1QFY21 due to the fire incident in March this year which heightened safety concerns and the Covid-19 impact.
• Management is unable to provide any RAPID petrochemical earnings guidance at this juncture due to volatile product prices given the uncertain economic outlook. Our forecasts now conservatively incorporate FY21F contributions from this associate at a PU of 50% vs. management’s guidance of 60%- 70%
• The group has allocated a capex of US$200mil–US$250mil (RM834mil–RM1bil), expected to be spent over 3 years, on 3 new specialty chemical projects — silicone blending plant in Gebeng, butadiene derivative plant in PIC and Kertih operations. We have not incorporated any contributions yet as the commencement dates lie beyond our current projections.
• PChem currently trades at a fair FY21F EV/EBITDA of 8.1x vs. its 2-year average of 8.5x, while its dividend yields are attractive at 3% vs. the current low interest rate regime.

Source: AmInvest Research - 19 Aug 2020