Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with an unchanged fair value of RM10.60/share, pegged to a lowered FY21F EV/EBITDA of 8.8x (from 10x earlier) and a premium of 3% for our ESG rating of 4 stars. This is at parity to PChem’s 2-year EV/EBITDA average as oil prices normalise around the US$65–US$75/barrel range.

• Pending an analyst briefing later, we have raised PChem’s FY21F–FY23F earnings by 19%–20% from a 5% increase in product price assumptions as the group’s 1HFY21 results exceeded expectations, even though our earlier FY21 net profit was already 18% above consensus.

• PChem’s 1HFY21 core net profit of RM3,126mil (+6.6x YoY) accounts for 65% of our FY21F earnings and 76% of street’s vs. 37%–59% for 1H over the past 3 years. With the substantively higher earnings, the group declared a higher interim dividend of 23 sen, 4.6x YoY from only 5 sen in 1HFY20.

• QoQ, the group’s 2QFY21 revenue rose by 20% to RM5.6bil, driven by product prices for both the fertiliser & methanol (F&M) and olefin & derivative (O&D) segments, further driven by overall plant utilisation (PU) rising by 7ppt to 97% following the completion of turnaround activities at the Labuan methanol plant and maintenance work for the fertiliser plants in Bintulu, Kedah and Sabah in 1QFY21.

• This drove up 2QFY21 EBITDA margin by 3ppt QoQ to 39%. Together with a 26% QoQ increase in JV/associate contributions to RM167mil from higher product price, core net profit rose 42% QoQ to RM1,833mil.

• For 2HFY21, PChem’s earnings could taper off as the group’s PU is likely to decline from an exceptionally strong 97% in 2QFY21 towards the lower range of 90% threshold, together with a softening in oil price expectations.

• In 2Q2021, crude oil price climbed 13% QoQ while polyethylene rose by only 4% QoQ, which led to its 5-year average discount to naphtha widening to 27% (Exhibit 7). Nevertheless, other products improved more substantively QoQ with benzene rising 42%, paraxylene 21%, urea 16% and methanol 12%.

• All in, we remain bullish on PChem’s earnings prospects given the strong correlation to its share price as rising naphtha costs should eventually lift petrochemical product prices. Given a 1– 2-month time lag between product price movement and recognition in PChem's revenue, we expect 2HFY21 earnings onwards to stage a stronger delivery as Brent crude oil prices traded at or above the US$70/barrel threshold currently vs. a 2Q2021 average of US$69/barrel.

• Given the improving earnings prospects of the group’s PIC operation in tandem with higher petrochemical price prospects, PChem currently trades at an attractive FY22F EV/EBITDA of 6.2x, below its 2-year average of 8.8x.

Source: AmInvest Research - 25 Aug 2021