Investment Highlights

• We maintain BUY on Petronas Chemicals Group (PChem) with an unchanged fair value of RM9.94/share, pegged to an FY23F EV/EBITDA of 8x at parity to its 2-year average and a premium of 3% for our 4-star ESG rating.

• We slightly tweaked FY22F earnings by +1.5% after pencilling in maiden earnings of Perstorp Holding, (Perstorp) as the RM7.3bil acquisition was completed last month. Note that we had only factored in Sweden-based Perstorp contributions in FY23F-FY24F earnings previously.

• We attended an analyst briefing last Friday, and these are the salient highlights:
  • The lower 9MFY22 plant utilisation 85% (vs. 94% in 9MFY21) was mainly due to higher turnaround activities. Management revealed 5 plant turnarounds so far this year compared to 3 turnarounds for 9MFY2021.
  • Nevertheless, we note that management maintains its earlier full-year FY22 plant utilisation guidance of above 90% on lower planned plant turnaround activities in 4QFY22. This should result in higher production and sales volumes for the final quarter, cushioning weaker petrochemical prices amid depressed crude oil prices.
  • The fire accident at the Pengerang Integrated Complex (PIC) last month only damaged one of its utilities lines that is still under construction, and PChem’s 50%-owned petrochemical facilities within the complex were largely unaffected based on preliminary assessments. However, in view of the integrated nature of PIC, the group’s productions have to be shut down to carry out various safety measures.
  • Despite the temporary setback, management expects the repair works to be completed by the end of 2022. This would subsequently pave the path for the resumption of PIC’s start-up operations by 1QFY23, as per management’s guidance.
  • PChem also managed to secure a deferral of trade payables of RM1,052mil to counterparties due to operational disruptions at PIC. This led to an RM276mil one-off finance income related to deferrals of trade payables in 3QFY22. Meanwhile, management also ruled out further significant impact to its earnings from the fire accident at this juncture based on preliminary assessments.
  • As the acquisition of Perstorp Holdings AB was officially concluded in October, maiden earnings contributions will commence in the upcoming 4QFY22. However, we caution that earlier incremental expectations to group earnings could be moderated given that the specialty chemicals company already posted a QoQ decline in 3QFY22 earnings amid weaker petrochemical prices.
• Given the long-term earnings prospects of the group’s Pengerang operation together with still-elevated petrochemical price prospects, PChem currently trades at an attractive FY23F EV/EBITDA of 7.5x, below its 2- year average of 8x and offers compelling dividend yields of 5%.

Source: AmInvest Research - 29 Nov 2022