Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with a higher fair value of RM10.90/share (from an earlier RM10.60/share), pegged to FY22F EV/EBITDA of 8.5x and a premium of 3% for our ESG rating of 4 stars. This is at parity to PChem’s 2-year EV/EBITDA average against the backdrop of oil prices trading at US$80/barrel currently.

• Pending an analyst briefing later today, we have raised PChem’s earnings by 23% for FY21F, 8% for FY22F and 13% for FY23F. The milder FY22F earnings increase stems from the impact of the prosperity tax for taxable income above RM100mil.

• PChem’s 9MFY21 core net profit of RM5,285mil (+4.5x YoY) was above expectations, accounting for 91% of our FY21F earnings and 95% of street’s. Given that the 9M earnings accounted for 63%–85% of the past 5 years, comparisons may not be reflective due to volatile commodity movements.

• The group declared a special dividend of 10 sen, which brings 9MFY21 DPS to 33 sen (6.6x YoY from only 5 sen in 9MFY20).

• QoQ, the group’s 3QFY21 revenue rose 3% to RM5.8bil, driven by higher product prices for both the fertiliser & methanol (F&M) and olefin & derivative (O&D) segments, partly offset by overall plant utilisation (PU) decreasing by 3 percentage points to 94% from higher maintenance at the olefin & derivatives division.

• Despite higher maintenance expenses eroding 3QFY21 EBITDA margin by 1 percentage point QoQ to 39%, a 23% QoQ increase in JV/associate contributions to RM255mil from higher product prices drove core net profit up by 7% QoQ to RM1,964mil.

• For 4QFY21, we expect firm earnings delivery given that plant utilisation has already stabilised at 94% currently from 97% in 2QFY21 amid buoyant crude oil prices which could rise further depending on the severity of the winter season in the northern hemisphere.

• In 3Q2021, crude oil price rose 7% QoQ while polyethylene slid 3% QoQ, which led to its 5-year average discount to naphtha widening to 26% (Exhibit 9). Nevertheless, other products improved more substantively QoQ with urea rising 18%, methanol 8% and paraxylene 6%.

• All in, we remain bullish on PChem’s earnings prospects given the strong correlation to its share price as firmer naphtha costs will support petrochemical product prices. Hence, we expect stable near-term earnings as Brent crude oil prices have recently traded at or above the US$80/barrel threshold vs. a 3Q2021 average of US$68/barrel.

• Given the improving earnings prospects of the group’s PIC operation in tandem with improved 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 - 22 Nov 2021