Investment Highlights

• We maintain our BUY recommendation on Petronas Chemicals Group (PChem) with an unchanged fair value of RM8.35/share based on a FY18F EV/EBITDA of 8x, on par with its 3-year average.

• Our PChem’s FY17F-FY19F earnings, which are currently 15%- 25% above consensus, are maintained as the group’s 9MFY17 net profit of RM3,172mil came in within our expectation but significantly above consensus.

• The group’s 9MFY17 net profit accounted for 75% of our FY17F and 86% of street’s RM3,679mil, vis-à-vis 9MFY14-9MFY16 contributing 67%-76 of FY14-FY16 earnings. The group did not declared a third interim dividend, as expected.

• PChem’s 3QFY17 net profit declined by 5% QoQ to RM913mil largely due to a 6% increase in the statutory turnaround-driven operating costs for the olefins and derivative segment and lower production of fertilisers and methanol.

• However, 3QFY17 revenue improved slightly by 1% QoQ, supported by a 4% increase in average prices which was mostly offset by lower sales volume as the group’s average plant utilisation declined to 86% from 90%. This stemmed from statutory turnaround activities for the derivative, MTBE and ammonia plants, partly offset by the full quarterly contribution from the Sabah Ammonia Urea plant (SAMUR), which commenced in May this year.

• The earnings decline stemmed equally from the olefin and derivatives division (OD), which fell 5% QoQ as the plant utilisation rate declined to 82% from 91% in 2QFY17, while the fertiliser and methanol segment (FM) decreased by 7% QoQ as the SAMUR plant’s full contribution was more than offset by the lower utilisation from the existing ammonia plant.

• YoY, the group’s 9MFY17 core net profit rose 51% from the increase in average product prices, stronger US dollar and the commencement of SAMUR, which more than offset the decline in average plant utilisation to 91% from 96%.

• For 4QFY17, the group’s product prices are expected to be buoyant with strong correlation to Brent crude oil prices which has risen 13% since 30 September this year to over US$64/barrel. So far in 4QFY17, naphtha has risen 10% while methanol increased by 7%, benzene and urea 5% and polyethylene 1%. Although paraxylene slid by 4% and polypropylene 3%, we view the general trend has turned slightly positive.

• We do not expect to significantly make any revisions to our forecasts and fair value pending the group’s analyst briefing later this evening. The stock now trades at an attractive FY18F EV/EBITDA of 7x, below its 3-year average of 8x, while dividend yields are attractive at 4%.

Source: AmInvest Research - 9 Nov 2017