Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) with an unchanged fair value of RM8.35/share based on a FY19F EV/EBITDA of 8x, on par with its 3-year average.

• Our PChem’s FY18F-FY19F earnings have been fine-tuned as the group’s FY17 net profit of RM4,177mil came in within our expectation but 6% above consensus. The group declared a second interim dividend of 15 sen, raising FY17 DPS to 27 sen (+ 8 sen YoY) to deliver a payout ratio of 52%, in line with our expectations.

• We note that the group’s 1HFY18 results are likely to be stronger as overall plant utilisation could rise from 93% in 4QFY18 to over 95% in the absence of any significant maintenance activities. However, 2HFY18 earnings could be softer as PChem’s ethylene cracker, methanol and ASEAN Bintulu Fertiliser plants will undergo turnaround activities, which could lead to an overall FY18F utilisation rate similar to 91% in FY17.

• PChem’s 4QFY17 net profit rose 10% QoQ to RM1,005mil as the group’s average plant utilisation rebounded to 93% from 86%, which had earlier undergone turnaround activities for the derivative, MTBE and ammonia plants. The results were further improved by higher product prices but partly offset by a stronger ringgit and a 7%-point increase in effective tax rate to 21%.

• On a YoY comparison, 4QFY17 revenue rose 20% due to higher product prices and commencement of the Sabah Ammonia Urea plant (SAMUR) in May 2017 which raised production volume by 14%, partly offset by a 3%-point decline in average of plant utilisation (excluding SAMUR). However, 4QFY17 net profit was flat YoY due to a lower proportion of ethane-based product mix and the 9%-point increase in effective tax rate.

• With crude oil prices trading at the US$60-US$70/barrel range, we expect limited upside with the end of the unusually cold winter season in the northern hemisphere and the unwinding of speculative futures positions amid a significant increase in US shale production which has raised overall daily oil production to above 10 mil barrels. Our house view for crude oil price remains at US$55-US$60/barrel for 2018.

• The group’s product prices have a strong correlation to Brent crude oil prices which have risen 20% since 30 September 2017 to over US$68/barrel. In 4Q2017, benzene has risen 29%, naphtha and polyethylene 10%. However, methanol has fallen by 5% due to oversupply with the completion of regional facilities’ turnarounds.

• PChem is currently trading at a fair 1-year forward EV/EBITDA of 8x, which translates to a 16% premium to Thailand’s PTT Global Chemicals (PTTGC).

Source: AmInvest Research - 21 Feb 2018