Investment Highlights

• We downgrade our recommendation on Petronas Chemicals Group (PChem) to HOLD from BUY as the share price has risen near to our unchanged fair value of RM7.05/share, pegging it to a higher FY21F EV/EBITDA of 9.6x, 1 standard deviation above its 2-year EV/EBITDA average of 8.5x.
• We maintain PChem’s FY20F–FY22F earnings as the group’s 9MFY20 core net profit of RM1,162mil (-53% YoY) came in within expectations, accounting for 70% of our FY20F earnings and 72% of street’s. As the group usually does not declare any dividend during the third quarter, the group’s 9MFY20 DPS was halved YoY to 5 sen due to group’s conservative policy amid the 2QFY20 pandemic impact.
• Even though PChem’s first 9 months of the year have accounted for a higher range of 76%–85% of FY17–FY19 earnings, a likely QoQ flattish 4QFY20 without any major turnaround activities should deliver results within 5% of market expectations.
• Despite plant utilisation (PU) rate falling 10ppt QoQ to 90%, PChem’s 3QFY20 core net profit surged 2.5x QoQ following a Covid 19-depressed 2QFY20. This stemmed mainly from higher product prices which rose in tandem with crude oil rising 33% QoQ, naphtha 55%, ethylene 36%, polyethylene 21%, polypropylene 11%, benzene 39% and paraxylene 6%.
• As there were no major maintenance activities in 3QFY20, the olefin & derivative (O&D) segment’s PU rate climbed to 100% from 98% in 2QFY20. However, for the fertiliser & methanol (F&D) division, it fell to 84% from 101% due to a 20-day loss of gas supply arising from a landslide at the Sabah Ammonia Urea plant in Sipitang.
• In 4QFY20, the group will register a one-off charge for impairment and provisions of RM232mil (US$56mil) arising from the cessation of its 40%-owned BASF Petronas Chemical’s loss-making butanediol operations in Kuantan by March 2021, translating to 14% of PChem’s FY20 earnings.
• Since September this year, product price directions have been mixed with crude oil stabilising above the US$40/barrel as naphtha decreased 11%, ethylene 9% and paraxylene 3% while benzene and methanol rose above 20%.
• As we have guided since 9 June this year, PChem’s product prices have a high 3-year coefficient correlation of 81% to crude oil prices. However, the 5-year polyethylene-naphtha spread has reversed from a discount of 27% on 5 June this year to a slight premium of 1% (See Exhibit 8).
• Given that uncertain global economic outlook has clouded the earnings prospects of the group’s 50%-owned Pengerang operation which partly deferred its commencement to 1QFY21, PChem currently trades at a premium FY21F EV/EBITDA of 9x, above its 2-year average of 8.5x.

Source: AmInvest Research - 19 Nov 2020