Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with an unchanged fair value of RM11.30/share, pegged to an unchanged FY23F 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 elevated oil prices trading above US$100/barrel currently.

• Following an analyst briefing last Friday, we maintain our forecasts. These are the salient highlights from the briefing:
  • PChem managed to divert cargos for Shanghai to other ports in China and ASEAN without incurring any discounts or additional costs in 1QFY22. In 2021, China accounted for 14%–15% of PChem’s sales volume, of which 5% was rerouted to other ASEAN countries in 1QFY22.
  • Management maintains FY22F plant maintenance (PU) guidance at above 90% even though it slid 2% points QoQ to 87% in 1QFY22 with the olefin & derivatives (O&D) segment dropping 26% points QoQ to 75%, partly offset by fertilisers & methanol (F&M) rising 11% points QoQ to 93%.
  • In 2QFY22, O&D will not undertake any significant turnaround activities (TA) with the completion of the aromatics plant in April this year while olefins, derivatives, glycols and MTBE facilities were completed in 1QFY22. However, F&M will conduct TA for 2 large plants – Methanol Plant 2 in Labuan and PC Fertiliser facility in Sipitang, Sabah. In 2HFY22, both O&D and F&M will not have any significant planned TA, which should drive overall PU to above 90%.
  • PChem’s capex, including growth projects, is likely to continue at RM1.5bil annually over the next 2 years, similar to FY20–FY21. This includes maintenance capex of RM700mil–RM800mil annually, in which management expects inflationary pressures to be largely mitigated by contractual terms with established suppliers.
  • The group’s 50%-owned petrochemical operation in Pengerang Integrated Complex has re-commenced operation on 8 May 2022 with management aiming to stabilise operations with an initial PU of 60%, gradually ramping to a FY23F target of 90%.
  • The group’s 1QFY22 associate contribution fell 29% QoQ to RM123mil (6% of group pretax profit) largely due to technical issues (which have been resolved recently) at 40%-owned BASF Petronas Chemical’s plant and lower spread for acrylic monomers and oxo products.

• Post-1QFY22, crude oil prices have risen further by 4% while naphtha decreased 3% and polyethylene was flat, tightening its 5-year average discount to naphtha to 20% from 1Q2022 average of 25% (Exhibit 9). Over the same period, ammonia prices rose 26%, benzene prices 16% and paraxylene 15%, while urea contracted 13%, methanol 6% and ethylene 2%. This supports our sanguine view of PChem’s firm earnings delivery over the next quarters.

• We remain positive on the proposed €1.54bil (RM7bil) acquisition of Sweden-based Perstorp Holding, which will be value-accretive and strengthen PChem’s basic petrochemicals portfolio while accelerating its expansion into higher margin derivatives, specialty chemicals and solutions. This involves end-markets such as paints and coatings, construction, automotive, personal care and food, feed and nutrition, and access to common end-markets which offers significant cross-selling opportunities and growth prospects to the rest of the group’s operations.

• We also 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$110/barrel threshold vs. a 1Q2022 average of US$107/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 FY23F EV/EBITDA of 7x, below its 2-year average of 8x and offers compelling dividend yields of 5%.

Source: AmInvest Research - 30 May 2022