Investment Highlights

• We maintain our HOLD recommendation on Petronas Chemicals Group (PChem) with an unchanged fair value of RM9.60/share based on FY19F EV/EBITDA of 10x — 3SDs above its 3-year average of 8x given the stock’s positive correlation to crude oil prices, which have stabilised above US$70/barrel.

• Our PChem’s FY18F-FY20F earnings have been fine-tuned even though 1HFY18 core net profit of RM2,590mil appears to be significantly above expectations, accounting for 59% of our earlier FY18F earnings and 63% of consensus, vs. 43%-54% for 1HFY15-FY17 against their respective years. We highlight that our FY18F-FY20F earnings are already 6%-8% above consensus. The group also declared a first interim dividend of 14 sen, 48% of our revised FY18F DPS.

• As we indicated in our past 2 results update, the group’s 1HFY18 results were expected to be strong with high plant utilisation rates coming in at 98% (vs. 94% in 1HFY17) as only 1 minor plant maintenance was undertaken 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 management had earlier indicated could mean an overall FY18F rate similar to 91% in FY17. This means that 2HFY18 plant utilisation rates could sharply drop to 84%, leading to lower earnings.

• Excluding a 1QFY18 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 2QFY18 core net profit rose 13% QoQ to RM1,372mil. This was mainly from a 9ppt decrease in effective tax rate to 8%, due to higher proportion of the group’s income falling under Labuan’s Global Incentive for Trading jurisdiction together with an 81% drop in minority charge with the acquisition of remaining stakes in PC Olefins and PC LDPE on 29 March this year.

• On a YoY comparison, 1HFY18 revenue climbed 12% due to higher product prices and commencement of Petronas Chemical Fertiliser Sabah S/B (formerly Sabah Ammonia Urea plant) in May 2017 amid a 4ppt improvement in plant utilisation. Together with a 2ppt reduction in effective tax rate to 12%, 1HFY18 net profit was 15% higher.

• The group’s product prices have a strong correlation to Brent crude oil prices which have slid by 8% since 30 June 2018 to US$72/barrel currently. Likewise, naphtha and benzene have dipped by 4%, polyethylene 3% and polyethylene 2%. However, this should be offset by methanol and paraxylene rising by 8% and 13% due to plant turnaround activities.

• PChem currently trades at a pricey FY19F EV/EBITDA of 10x, which translates to a 54% premium (vs. its 3-year average premium of 29%) to Thailand’s PTT Global Chemicals’ 6.5x.

Source: AmInvest Research - 16 Aug 2018