Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with an unchanged fair value of RM10.90/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.

• Our forecasts are maintained following the analyst briefing yesterday. These are the salient highlights:
  • Management expects a softer 4QFY21 after registering a record 3QFY21 net profit of RM1,964mil (+4.2x YoY) given potentially a lower group plant utilisation rate (PU) from turnaround activities for the 63.5%-owned ASEAN Bintulu Fertlizer plant which could stretch to 40 days.
  • Recall that 3QFY21 still registered stronger earnings from higher product prices despite a 3%-point PU decline to 94%, mainly from turnaround activities at PC Fertiliser Kedah which caused a 4%-point drop in fertilizer & methanol (F&M) PU to 92%.
    Meanwhile, the olefin & derivative (O&D) segment secured a stable 3QFY21 PU of 98% during pitstop activities at PC ethylene and polyethylene plants in Kerteh.
  • The 9MFY21 PU of 94% (vs. 95% in 9MFY20) is comfortably within management’s earlier FY21F guidance of 94%–95%. For FY22F, management is still guiding for PU of over 90% despite turnaround activities at 4 plants – ethylene, derivatives, methanol and aromatic lines.
    Repair & maintenance costs next year are expected to be similar to FY21F as the number of turnaround projects are comparable.
  • For the 2022 prosperity tax, management indicated a 4%–5% increase in tax based on the lower taxable income of FY20, which registered an effective tax rate of 15%. This is likely to be lower than our more conservative FY22F effective tax rate of 20%.
    Even so, we retain our tax assumption given that higher product prices have boosted FY22F pretax profit currently to 4.1x FY20.
  • The group’s 50%-owned petrochemical operations at the Pengerang Integrated Complex (PIC), which was earlier expected to start commercial operations in 4QFY21, now appears to begin in 1QFY22 given the need to slowly ramp up activities given that Petronas’ integrated assets have been idle for over a year.
    For now, we maintain an average FY22F PIC PU of 60%–70%, which is likely to reach breakeven for the group.
• 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 steady near-term earnings as Brent crude oil prices has 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 - 23 Nov 2021