- We maintain our HOLD call on Petronas Chemicals Group (PChem), but with a slightly higher fair value of RM7.20/share (from an earlier RM7.00/share), pegged to an unchanged FY13F EV/EBITDA of 7.5x – which is at a 10% premium to Thailand’s PTT Global Chemicals’ 7x.

- We have raised PChem’s FY13F-FY15F earnings by 4% from a 1%-point increase in our FY13F product price increase assumption to 3% as the group’s 1QFY13 net profit of RM1,105mil was slightly ahead of expectations, accounting for 28% of our FY13F net profit of RM3,949mil and 29% of street’s RM3,812mil. The group did not declare any interim dividend, as expected.

- Sequentially, PChem’s 1QFY13 revenue rose by only 2% to RM4,455mil but pre-tax profit doubled to RM1,651mil largely due to:

(i) stronger operational fertiliser & methanol performance on improved methane feedstock supply,

(ii) improved product margins amidst lower feedstock costs, and

(iii) absence of the 4QFY12 one-off expenses of RM490mil arising from the discontinuation of the group’s vinyl business.

- With the normalisation of effective tax rate in 1QFY13 vs a positive tax charge in 4QFY12 due to deferred tax clawbacks in the fertiliser & methanol division, the group’s net profit rose at a slower 23% QoQ.

- On a YoY comparison, the group’s 1QFY13 net profit was up 8% on a flattish turnover, as the higher margins was driven largely by the fertiliser and methanol segment. During the quarter, tight global supply led to higher prices for ammonia and urea. Additionally, this segment enjoyed improved methane gas supply.

- We caution that PChem’s 2QFY13 results may be softer given that crude oil prices and polyethylene prices have fallen by 7% and 3% respectively from 31 March this year.

- In the near- to medium-term, the outlook for olefin, polymer and methanol prices is clouded given the uncertain direction of the global economy. Since the beginning of this year, European Brent crude oil price has risen by 6%, polyethylene up by 7% and polypropylene 15%. But ethylene fell 20%, benzene 10% and paraxylene 10% while methanol was flat (See Charts 3-5).

- The stock currently trades at a fair FY13F EV/EBITDA of 6.5x, which is at a discount to PTT Global Chemicals’ 7x.

Source: AmeSecurities