Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) but with a higher fair value of RM9.60/share (from an earlier RM8.35/share) by raising FY19F EV/EBITDA from 8x to 9.3x, based on 2SDs above its 3-year average of 8x given the stock’s positive correlation to crude oil prices, which have risen above US$75/barrel. We note that the share price has already outperformed the FBM KLCI by 9ppts due to the upturn in crude oil prices over the past 6 months.

• Our PChem’s FY18F-FY20F earnings are maintained as the group’s 1QFY18 core net profit of RM1,218mil generally came in within expectations, accounting for 28% of our FY18F earnings and 30% of consensus, vs. 19%-31% for 1QFY15- FY17 against their respective years. We highlight that our FY18F-FY20F earnings are 8-9% above consensus. The group did not declare a first interim dividend as expected.

• As we had highlighted in our 4QFY17 results update, the group’s 1HFY18 results are likely to be strong with high plant utilisation rates with only 1 minor plant maintenance in 2QFY18. However, 2HFY18 earnings could soften as 4 plants, which include the ethylene cracker, methanol and ASEAN Bintulu Fertiliser plants, will undergo turnaround activities that could lower the 1QFY18 utilisation rate of 100% to an overall FY18F rate similar to 91% in FY17.

• Excluding an exceptional loss of RM153mil (forex movement on shareholder loans) from the RM3.8bil disposal of a 50% equity stake in PRPC Polymers S/B to Saudi Aramco, PChem’s 1QFY18 core net profit surged 21% QoQ as the group’s average plant utilisation climbed to full utilisation at 100% from 93% together with a 4ppt decrease in effective tax rate to 17%. The results were further improved by higher product prices although partly offset by a stronger ringgit.

• On a YoY comparison, 4QFY17 revenue rose 6% due to higher product prices and commencement of Petronas Chemical Fertiliser Sabah S/B (formerly Sabah Ammonia Urea plant) in May 2017 amid a slight 1ppt improvement in plant utilisation. However, 1QFY18 core net profit dipped 6% YoY due to RM120mil under-accrual of FY17 manpower expenses amid a stronger ringgit which offset the impact of higher USD revenues.

• The group’s product prices have a strong correlation to Brent crude oil prices which have risen 14% since 31 March 2018 to US$79/barrel. Likewise, naphtha has strengthened by 13% while urea 6% and polyethylene 5%. However, benzene and polypropylene was flat while ethylene fell 10% and methanol 2% due to overcapacity.

• PChem is currently trading at a fair 1-year forward EV/EBITDA of 9x, which translates to a 25% premium to Thailand’s PTT Global Chemicals’ (PTTGC) 7.2x, which near the 3-year premium of 28%.

Source: AmInvest Research - 22 May 2018