• We downgrade Petronas Chemicals Group (PChem) to HOLD from BUY with a lower fair value of RM7.45/share (from RM9.94 previously), pegged to an FY24F EV/EBITDA of 8x (at parity to its 2-year EV/EBITDA average) and a premium of 3% for our unchanged 4-star ESG rating.

• We cut PChem’s FY23F-FY25F earnings by 15%-35% to account for lower product prices as the group’s 1HFY22 core net profit (CNP) of RM1,087mil (-72% YoY) was below expectations, accounting for 31%-33% of our earlier FY23F earnings and street estimates. As a comparison, 1H accounted for 46%-52% of FY21–FY22 CNP. Likewise, the group declared an interim dividend of 8 sen (-68% YoY), translating to a payout ratio of 53%.

• On a sequential basis, PChem’s 2QFY23 core net profit declined by 12% to RM596mil in tandem with a 6% contraction in revenue to RM7.1bil. This stemmed from a decline in plant utilisation rate to 82% from 96% in 1QFY23 due to gas supply limitation at PC Methanol Labuan and PC Fertiliser Sabah, coupled with higher plant maintenance activities. QoQ, this caused fertiliser & methanol (F&M) revenue to drop 22% and EBITDA by 41%, partly offset by olefin & derivative’s EBITDA almost doubling to RM584mil from unrealised forex gains of RM146mil and higher plant utilisation of 98% (vs. 94% in 1QFY23).

• The Sabah-Sarawak gas pipeline (SSGP), which experienced a leakage due to soil movement, has been rectified within 20 days in 2QFY23. This will likely lead to a rebound in F&M plant utilisation, which dropped to 73% from 97% in 1QFY23. However, PChem’s earnings prospects will be impacted by the low utilisation of the Pengerang petrochemical plant, which bore losses of RM100mil in 1QFY23 and RM70mil in 2QFY23 as its operation has yet to stabilise.

• PChem currently trades at fair FY24F EV/EBITDA of 7.7x, near its 2- year average of 8x and offers an unassuming dividend yield of 2%.

Source: AmInvest Research - 23 Aug 2023