Investment Highlights

• We upgrade Petronas Chemicals Group (PChem) to a BUY from HOLD with a higher fair value of RM10.60/share (from an earlier RM8.30/share), pegged to an FY21F EV/EBITDA of 10x and a premium of 3% for our ESG rating of 4 stars. This is 1 standard deviation above its 2-year EV/EBITDA average of 8.6x.

• Pending an analyst briefing later, we have raised PChem’s FY21F–FY22F earnings by 51%–58% from a 15%–20% increase in product price assumptions as the group’s 1QFY21 net profit of RM1,461mil (+3.9x YoY) exceeded expectations, accounting for 47%–56% of our and street’s FY21F net profit. The group did not declare any interim dividend as expected.

• QoQ, PChem’s 4QFY20 revenue rose by 22% to RM4.7bil, driven by product prices for the fertiliser & methanol (F&M) and olefin & derivative (O&D) segments, partly offset by plant utilisation (PU) declining by 4 percentage points to 90% caused by turnaround activities at the Labuan methanol plant and maintenance work for the fertiliser plants in Bintulu, Kedah and Sabah.

• This drove up 1QFY21 EBITDA by 34% to RM1,816mil. Together with a reversal of JV/associate contributions to RM133mil (from an earlier loss of RM266mil) from higher product price and halving of effective tax rate to 6.6%, net profit surged 2.1x QoQ.

• We believe the impressive associate/JV performance also stemmed from the earlier 4QFY20 losses arising from the cessation of 40%-owned BASF Petronas Chemical’s butanediol operations to shift towards higher value chemicals portfolio.

• With the completion of the MTBD PDH plant turnaround in Gebeng, the O&D’s PU rose to 101% in 1QFY21 from 93% in 4QFY20. However, the F&D’s PU fell to 84% in 1QFY21 from 94% in 4QFY20 due to multiple corrective maintenance activities.

• Since the beginning of this year, product price directions have risen with crude oil rising by 34% to US$68/barrel in tandem with urea increasing 59%, benzene 42%, paraxylene 36%, naphtha 27%, methanol & ethylene 11% and polyethylene 10%. Only polypropylene was flat due to excess capacity.

• As PChem’s product prices have a high 3-year coefficient correlation of 70%–80% to crude oil prices, the 5-year polyethylene-naphtha spread has reversed from a premium of 25% towards the end of March this year to a slight discount of 7% currently (Exhibit 8), indicating further upside as crude oil prices have climbed further by 17% to US$68/barrel from the 1Q2021 average of US$58/barrel.

• Given the improving earnings prospects of the group’s 50%- owned Pengerang operation in tandem with higher petrochemical prices, PChem currently trades at an attractive FY21F EV/EBITDA of 7.6x, 12% below its 2-year average of 8.6x.

Source: AmInvest Research - 27 May 2021