Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with an unchanged fair value of RM10.60/share, pegged to a FY21F EV/EBITDA of 8.8x and a premium of 3% for our ESG rating of 4 stars. This is at parity to PChem’s 2-year EV/EBITDA average.

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

• Management expects the record 2QFY21 net profit of RM1,860mil (+10x YoY) to be sustainable in 3QFY21 given the flattish-to-higher outlook for petrochemical prices and absence of any turnaround activities, which will only occur for the 63.5%- owned ASEAN Bintulu Fertlizer plant in November this year.

• Recall that the exceptional 2QFY21 performance stemmed largely from higher product prices despite a 4% YoY production volume decline. For 3QFY21, management expects prices to rise for polymer while ethylene, mono- ethylene glycol, paraxylene, urea, ammonia and methanol remain flattish.

• Average group plant utilisation (PU) rate, which reached 97% in 2QFY21 and 94% in 1HFY21, is expected to range between 93% and 94%, in line with our assumptions.

• Hence, its strong 2QFY21 EBITDA margin of 39%, up 15ppt YoY, is likely to be sustainable in the subsequent quarter given that 1HFY21 operating cost, which rose 15% YoY, did not have any unusual variation.

• The record quarterly dividend of 23 sen in 1QFY21, translating to a payout ratio of 55%, is also likely to be maintained given the group’s distribution policy of 50% of PATAMI.

• The group’s 50%-owned petrochemical operations at the Pengerang Integrated Complex (PIC) is expected to ramp up commercial operations in 4QFY21, which could lead to an average FY21F PU of 60%–70%. Given the buoyant product prices currently, management expects this substantive investment to at least break even in FY21F, as guided in our update on 12 Aug.

• The group’s capex, which reached only RM616mil in 1HFY21, is expected to accelerate to the unchanged target of RM2.5bil. Hence, our FY21F–FY22F capex assumptions of RM2.2bil– RM2.5bil are unchanged.

• All in, we remain bullish on PChem’s near-term 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 steady 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 6.4x, below its 2-year average of 8.8x.

Source: AmInvest Research - 26 Aug 2021