Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with an unchanged fair value of RM10.90/share, pegged to a FY22F EV/EBITDA of 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 against the backdrop of oil prices trading at US$90/barrel currently.

• Pending an analyst briefing later today, we have marginally tweaked PChem’s earnings FY22–FY23F earnings. The milder FY22F earnings increase stems from the impact of the prosperity tax for taxable income above RM100mil. We also introduce FY24F earnings with a mild 2% growth on a flat product price assumption.

• PChem’s FY21 core net profit of RM7,223mil (+2.9x YoY), which excludes fair value gains and inventory write-backs, was within our expectations but above street’s, coming in 12% above consensus estimates.

• However, the group declared a second interim dividend of 23 sen to bring FY21 DPS to 56 sen, 8% higher than our estimate as the payout ratio of 61% was above management’s guidance of at least 50%.

• QoQ, the group’s 4QFY21 revenue rose 21% to RM7bil, driven by higher product prices for the fertiliser & methanol (F&M) and olefin & derivative (O&D) segments, partly offset by overall plant utilisation (PU) decreasing by 5% points to 89% from statutory turnaround activities in the Bintulu ferliser plant and maintenance work at the Labuan methanol plants.

• Higher maintenance expenses, which eroded 4QFY21 EBITDA margin by 5% points QoQ to 33%, and a 32% QoQ drop in JV/associate contributions mostly offset higher product prices, leading to a flat core net profit of RM1,965mil.

• In 4Q2021, crude oil price rose 8% QoQ while polyethylene rose 10% QoQ. Sequentially, naphtha rose 11%, ethylene 7% and polypropylene 6% over the same period while urea surged 62% from supply restrictions in China and Russia.

• Post-4QFY21, crude oil prices surged 22% while polyethylene rose by only 5%, widening its 5-year average discount to naphtha to 27% from 22% on 31 Dec 2021 (Exhibit 9).

• Over the same period, benzene prices rose 6% and paraxylene up 5% while ethylene prices declined 3% with polypropylene down 2%. However, urea prices normalised somewhat, declining by 14% as production improved after supply cuts towards the end of 2021.

• 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$90/barrel threshold vs. a 4Q2021 average of US$79/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 and offers compelling dividend yields of 5%.

Source: AmInvest Research - 24 Feb 2022