Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with an unchanged fair value of RM10.90/share, pegged to an FY22F EV/EBITDA of 9x 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.

• Our forecasts have been slightly adjusted following an analyst briefing yesterday. These are the salient highlights:

• PChem’s FY21 plant utilization (PU) of 93% (vs. 94% in FY20) was slightly below management’s earlier FY21F guidance of 94%–95% due to 4 major turnaround activities at the Gebeng propane dehydrogenation, Labuan methanol 1, Kedah fertilizer and Asean Bintulu fertilizer plants together with pitstop at the ethylene and polyethylene facilities in Kerteh. Even so, we maintain our FY22F–FY24F PU of 95% with management still guiding for FY22F PU of over 90% despite turnaround activities this year at 4 plants – ethylene, derivatives, methanol and aromatic lines. Likewise, repair & maintenance costs this year are expected to be flattish as the number of turnaround projects are comparable.

• Management indicated that FY22F–FY23F capex is likely to range RM2bil–RM2.5bil, within our assumptions. We note that FY20–FY21 annual capex of RM1.5bil was 36% below RM2.4bil in FY19 due to the project execution delays caused by Covid-19 movement restrictions.

• For the 2022 prosperity tax, management now guides for a minimal impact to the group given PChem’s huge amount of available capital allowances mainly from the 50%-owned petrochemical operations at the Pengerang Integrated Complex (PIC), which cut the group’s effective tax rate to 5% in FY21 from 15% in FY20. Recall that the group had indicated a 4%–5% increase in tax based on the lower taxable income of FY20 in the previous analyst briefing. As such, we have adjusted our effective tax assumptions accordingly.

• PIC, which was earlier expected to start commercial operations in 4QFY21, is now likely to progressively begin in 2QFY22 given the need to ramp up activities in tandem with Petronas’ refinery against the backdrop of the integrated assets being idle for over a year. The original commencement date for PIC was in 1Q2019.

• Hence, we have lowered PIC’s FY22F average PU from 60% to 50%, which is still likely to reach breakeven for the group given the progressive ramp-up amid current high product prices. Management indicated that any positive PIC contribution would likely be minimal to FY22F group earnings.

• In the oleochemical division, PChem still aims to expand its specialty chemicals business, which has more stable and superior margin vs. polyethylene, from 3% of FY21 group revenue to a target of 20%. Hence, PChem has invested RM50mil in a silicone balancing facility (8,000 tonne annually) in Gebeng, Pahang and RM200mil in a melamine plant (60,000 tonne annually) at the fertilizer plant in Kedah.

• All in, we remain bullish on PChem’s share price trajectory given the strong correlation of petrochemical prices to crude oil. Hence, we expect stronger near-term earnings as Brent crude oil prices have traded above the US$90/barrel threshold vs. a 4Q2021 average of US$79/barrel.

• Given improving earnings prospects underpinned by robust petrochemical prices, PChem currently trades at an attractive FY22F EV/EBITDA of 7x, below its 2-year average of 9x and offers compelling dividend yields of 5%.

Source: AmInvest Research - 25 Feb 2022