Investment Highlights

• We maintain HOLD on Petronas Chemicals Group (PChem) but with a higher fair value of RM8.30/share (from RM7.05/share), pegged to a higher FY21F EV/EBITDA of 12x, 1 standard deviation above its 2-year EV/EBITDA average of 9.6x.

• Pending an analyst briefing later, we maintain PChem’s FY21F– FY22F earnings as the group’s FY20 net profit of RM1,628mil (- 44% YoY) came in within our and street’s expectations.

• However, excluding the one-off charge for impairment and provisions of RM232mil (US$56mil) arising from the cessation of PChem’s 40%-owned BASF Petronas in Kuantan, the core net profit of RM1,860mil was 11%–12% above our and street’s forecasts. Additionally, the group’s FY20 dividends of 12 sen were 9% above expectations with a final 4QFY20 DPS of 7 sen, translating to a higher FY20 payout ratio of 60% vs 51% in FY19.

• QoQ, the group’s 4QFY20 revenue rose by 11% to RM3.8bil, driven by higher sales volume and prices for both the fertiliser & methanol (F&M) and olefin & derivative (O&D) segments. While this drove up 4QFY20 EBITDA by 30% QoQ, associate losses of RM266mil vs. a profit of RM27mil in 3QFY20 together with the doubling of effective tax rate to 12% led to the slight 4QFY20 net profit decline to RM466mil.

• The associate losses stem from the cessation of 40%-owned BASF Petronas Chemical’s butanediol operations to shift towards higher value chemicals portfolio, which we had forewarned in November last year.

• Higher statutory turnaround activities caused the O&D’s plant utilisation (PU) to decrease to 93% in 4QFY20 from 100% in 3QFY20. However, the F&D’s PU rose to over 90% in 4QFY20 from 84% in 3QFY20, which suffered from a 20-day loss of gas supply arising from a landslide at the Sabah Ammonia Urea plant in Sipitang.

• Since the beginning of this year, product price directions have been mixed with crude oil rising by 25% to US$64/barrel as methanol fell 12%, ethylene 10% and benzene 7% while napththa rose 20%, urea 40% and paraxylene 11%.

• 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 premium of 7% to a discount of 16% currently (Exhibit 8), indicating some limited upside.

• 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 12x, 23% above its 2-year average of 9.6x.

Source: AmInvest Research - 23 Feb 2021