Investment Highlights

• We maintain BUY on Petronas Chemicals Group (PChem) with a lower fair value of RM10.13/share (from RM11.30/share previously), pegged to an unchanged FY23F EV/EBITDA of 8x and a premium of 3% for our unchanged 4-star ESG rating. This is at parity to PCHem’s 2-year EV/EBITDA average.

• Pending an analyst briefing later today, we reduce PChem’s FY22F–FY24F earnings by 6–10% on expectations of weaker petrochemical product prices in 2HFY22 in tandem with the pullback in oil prices lately.

• PChem’s 1HFY22 core net profit (CNP) of RM3.9bil (+17% YoY) was below our expectations but within consensus, accounting for 48% of our FY22F earnings and 51% of street estimates. As a comparison, 1H accounted for 37–46% of FY20–21 CNP. The group declared a slightly higher first interim dividend of 25 sen (+9% YoY), translating to an unchanged 10% payout ratio.

• On a QoQ basis, PChem’s 2QFY22 revenue was flattish at RM6.6mil despite higher product prices mainly due to lower sales volumes as plant utilisation rate dropped to 72% from 87% in 1QFY22 mainly due to increased statutory plant turnaround and maintenance activities. Hence the group’s 2QFY22 CNP declined 13% QoQ to RM1.8bil, weighed down by the lower sales volumes and cost efficiencies, which led to a 5%-point reduction in EBITDA margin.

• In 2Q2022, crude oil price rose by 5% QoQ while benzene, paraxylene and ammonia increased by larger magnitudes of 10%–19%. However, prices of naphtha, ethylene, polyethylene, polypropylene and methanol fell 2–7%. Notably, urea prices weakened by 14% and have further deteriorated by 25% since the end of 2QFY22.

• Despite the weaker outlook for petrochemical products price in 2HFY22, we remain bullish on PChem’s earnings prospects due to the fact that crude oil prices have found support at the US$90–95/barrel threshold lately which will help support the group’s selling prices in near term.

• We are also positive on the proposed €1.54bil (RM7bil) acquisition of Sweden-based Perstorp Holding AB, which will be value-accretive and strengthen PChem’s basic petrochemical portfolio while accelerating its expansion into higher margin derivatives, specialty chemicals and solutions.

• Given the improving earnings prospects of the group’s PIC operation in tandem with still elevated 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 - 22 Aug 2022