- We upgrade our call on Petronas Chemicals Group (PChem) from HOLD to BUY with a higher fair value of RM7.60/share (from an earlier RM7.20/share), pegged to a FY14F EV/EBITDA of 7.5x – which is at a 25% premium to Thailand’s PTT Global Chemicals’ (PGC) 6.3x.

- We have raised PChem’s FY13F-FY15F earnings by 4% following a 0.5%-point increase in our FY13F product price assumption to 3% due to the generally improved price environment.

- The group’s 1HFY13 net profit of RM2,063mil was within expectations, accounting for 50% our FY13F net profit of RM4,107mil and 53% of street’s RM3,894mil. Note that our FY13F-FY15F earnings are currently 6%-20% above street estimates. PChem declared a flat YoY interim dividend of 8 sen as expected.

- As forewarned in our report on 28 May this year, PChem’s 2QFY13 revenue fell by 13% QoQ to RM583mil due to lower olefin and fertilizer prices coupled with lower product volumes as the group undertook higher plant maintenance activities, which cut plant utilisation rates. Hence, the group’s 2QFY13 net profit likewise contracted by 14% QoQ to RM946mil.

- On a YoY comparison, the group’s 1HFY13 net profit was up by 10% on a flattish turnover, driven by better olefin and derivative prices coupled with higher product volumes due to improved plant utilisation rates that led to increased gas supply for the methanol segment.

- We expect PChem’s 2HFY13 results to be stronger given that crude oil and polyethylene prices have risen by 11% and 3% respectively from June 30 this year.

- Since the beginning of this year, WTI crude oil price has risen by 18%, methanol by 11%, polyethylene by 7% and polypropylene by 5%. But urea fell by 17% and naphtha by 3% (See Charts 3-6).

- The strengthening US dollar vs ringgit will have a net positive impact on PChem given its largely US$-denominated revenues. While a large portion of the group’s raw material costs are naturally hedged, we estimate that a 10% increase in US$ will translate to a 5% increase in FY14F earnings.

- The improving economies in US and Europe (see Chart 11) also augurs well for the group’s near-term and medium-term outlook, underpinned by the rise in crude oil prices which has strong correlations to the margins of PChem’s olefin operations. The stock currently trades at an attractive FY14F EV/EBITDA of 6X, which is at parity to PGC’s 6x but way below PChem’s peak premium of 26% to PGC in June last year.

Source: AmeSecurities