Investment Highlights

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

• Following our results update and the 3QFY17 analyst briefing yesterday, we highlight the following salient points:

• Average plant utilisation slipped to 86% from 90% in 2QFY17 due to Kerteh statutory and major maintenance at PC Olefins which caused ethylene output to decline 13% QoQ to 225K MT and the olefin & derivative plant utilisation rate to drop to 82% from 91%.

• While PC Ammonia in Kerteh also underwent turnaround activities, the fertilizer and methanol plant utilisation rate was flat QoQ at 88%, supported by PC Fertiliser's stable production and feedstock supply at Labuan.

• While a major cracker turnaround activity is scheduled in 3Q2018, management expects to achieve an overall average plant utilization rate of over 90%, similar to 91% in 9MFY17. The group’s 4QFY17 plant utilization is likely to be stable given that there was a methanol turnaround, which is expected to be completed soon.

• The group’s capex for FY17F is expected to be over 20% higher than RM4bil last year vs. RM3.5bil in 9MFY17, which is roughly in line with our expectations.

• The group's 40%-owned US$500mil Aroma plant with BASF in Gebeng, Kuantan has commenced operations progressively from September this year. Recall that it produces citral and its precursors, such as citronellol and L-menthol for the flavor and fragrance industry, and are used in home and personal care products, fine fragrances, food and pharmaceutical applications. However, as the Aroma plant’s capacity of 30,000 MT annually represents only 1% of the PChem’s 2.7mil MT, it is not expected to significantly contribute to group earnings next year. Likewise, the highly reactive polyisobutene plant expected to commence early next year with an annual capacity of 50,000 MT will also have a slight earnings impact.

• As we mentioned yesterday, the group’s product prices are expected to be buoyant in 4QFY17 with a strong correlation to Brent crude oil prices which have 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 maintain our view that the general trend has turned more positive.

• The stock currently trades at an attractive FY18F EV/EBITDA of 7x, below its 3-year average of 8x, while dividend yields are fair at 4%.

Source: AmInvest Research - 10 Nov 2017