Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) with an unchanged fair value of RM8.30/share, pegged to an FY21F EV/EBITDA of 12x, 1 standard deviation above its 2-year EV/EBITDA average of 9.6x.

• Our forecasts are marginally adjusted following the analyst briefing yesterday. These are the salient highlights:

• The group will be entering into a fresh 3-year cycle of high plant turnaround and maintenance activities with FY21F capex expected to rise by 73% to RM2.6bil from RM1.5bil in FY20. The FY21F capex will comprise RM700mil for turnaround of 5 major facilities, RM600mil for ongoing maintenance, RM650mil for its 50%-owned Pengerang Integrated Complex’s (PIC) new petrochemical operations and RM600mil for growth projects. Hence, we have raised our FY21F capex assumption accordingly by 14% from an earlier RM2.2bil.

• While the turnaround activities are expected to involve the main petrochemical facilities in Kerteh, Gebeng, Labuan and Bintulu, management plans to gradually execute the programme to achieve plant utilization rates of over 90% across the next 3 years.

• The commencement of PIC’s operations has again been deferred to 2H2021 from the recent 1Q2021 and original target of 2H2020 due to the fire incident in March 2020 and the Covid- 19 pandemic, which has restricted movements and dampened global demand.

• While management hopes that PIC will be EBITDA positive in 2H2021 with plant utilization above 80%, this is likely to register a net loss due to the start-up costs, high depreciation and interest charges. Hence, we have not included any significant contribution from PIC in FY21F.

• The group plans to invest RM6bil in new growth projects over the next 5–7 years. Recall that 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. Hence, management has not revised its dividend policy of 50% of net profit vs. 60% in FY20. We have not incorporated any contributions yet as the commencement dates lie beyond our current projections.

• Given the uncertain global economic outlook has clouded the earnings prospects of Pengerang’s operation, PChem currently trades at a premium FY21F EV/EBITDA of 12x, 23% above its 2- year average of 9.6x.

Source: AmInvest Research - 24 Feb 2021