Investment Highlights

• We maintain HOLD on Petronas Chemicals Group (PChem) w a lower fair value (FV) of RM5.90/share (from RM6.22/shar pegged to FY25F EV/EBITDA of 8x - at par to its 5-year avera of 8x. Our FV reflects our 4-star ESG rating which accords a 3 premium .

• Our FV revision is to account for softer average selling pric (ASPs) owing to the current downcycle. Similarly, we adju FY24-FY26F earnings downwards by 9%-11%.

• PChem’s 1HFY24 core net profit (CNP) of RM886mil (excludi one-offs) was below expectations as the annualised res missed our earlier forecast by 8% and street’s by 14%.

• Notably, exceptional items include a fair value gain remeasurement for payment of trade payables of RM353m related to utilities cost for the group’s soon-to- commissioned Pengerang Integrated Complex (PIC) in Joh According to management, this arose from relief accorded Tenaga Nasional through the deferral of payments for tra payables due from the group amounting to RM1.7bil by mo than 5 years.

• Additionally, the group declared a dividend per share (DPS) 10 sen, a 25% YoY increase. This implies a payout of 56% a is higher than its policy of 50% of profit after tax and no controlling interest (PATANCI).

• YoY, PChem’s 1HFY24 revenue was flat at +3.8% driven higher sales volume from PIC, the specialties segment a strategic sourcing initiatives for the Fertiliser & Methanol (F& segment. 1HFY24 group CNP declined by 19.5% as income fro associates and JV turned negative, mainly from higher pla operational costs and a spike in effective tax rate by 4.

• QoQ, the group reported a smaller decline in CNP for 2QFY of 7.3%, despite a 3% rise in topline numbers, as t performance from commodity segments - Olefins & Derivativ (O&D) and F&M - appear mixed but was supported by t Specialties division, which saw higher margins from strong average selling prices (ASPs) for engineered fluids, advanc materials, silicones and lube oil additives/chemicals.

• During the quarter, PChem recorded a plant utilisation rate 89% (vs. 87% in 1QFY24) due to stronger plant performance most plants except Petronas Chemical (PC) Aromatics, ASEA Bintulu Fertilizer (ABF) and PC Fertiliser Kedah, whi experienced scheduled and unscheduled shutdowns. T remaining shutdowns scheduled for the year are for P Methanol in Labuan (Jun), PC Polyethylene (September) a ABF in 4QFY24.

• Management notes that PIC has successfully completed the performance test run (PTR) for nearly all plants in PIC, except for glycol and isononanol products, which are expected by 3Q. Following this, PIC is expected to commence commercial operations.

• Moving forward, we expect a gradual recovery in near-term earnings performance backed by stronger utilisation rates. However, we remain cognizant of the sluggish demand environment and believe product prices will remain flattish for now amidst slow global economic growth and high inflation.

• PChem appears unattractive at a current FY24F EV/EBITDA of 10x, a 17% premium to its 5-year EV/EBITDA average of 8x and offers an unassuming dividend yield of 2%-2.5%.

Source: AmInvest Research - 19 Aug 2024