-  We maintain our HOLD call on Petronas Chemicals Group (PChem) with a lower fair value of RM7.20/share (from an earlier RM7.60/share), pegged to an unchanged FY14F EV/EBITDA of 7.5x – which is at a 10% premium to Thailand’s PTT Global Chemicals’ (PGC) 6.8x.

-  We have cut PChem’s FY13F-FY15F earnings by 6%-8% due to a 3%-point reduction in sales volume and 1%-point cut in average product price growth to incorporate an annual product price increase of 3% for FY13F.

-  The group’s 9MFY13 net profit of RM2,697mil came in below expectations, accounting for 66% of our earlier FY13F net profit of RM4,107mil and 69% of street’s RM3,903mil. This stemmed from a higher than expected volume impact from plant maintenance activities in the Kertih cracker plant. PChem did not declare any interim dividend as expected.

-  PChem’s 3QFY13 revenue fell by 9% QoQ to RM3,527mil largely due to reduced sales volumes as the group’s Kertih cracker plant underwent major maintenance work, which we estimate had reduced overall utilisation rate to below 80% from 83.2% in 2QFY13. Hence, the group’s 3QFY13 net profit fell by 33% QoQ to RM635mil.

-  On a YoY comparison, the group’s 9MFY13 net profit was up slightly by 3% despite a revenue contraction to RM11.9bil as the impact of lower plant utilisation rates were offset by higher product prices for olefin, derivatives, methanol and ammonia.

-  We expect plant utilisation rates to recover in 4QFY13 but this could be partly offset by lower olefin and derivative prices.

-  Since 30 September this year, the price for WTI crude oil has declined by 9%, methanol 9%, ethylene 6%, benzene 6% and paraxylene 3%, while naphtha rose by 3% with polyethylene, polypropylene and urea largely unchanged (See Charts 3-6).

-  The strengthening of the ringgit vs. USD by 3% since 30 September this year will have a slightly net negative impact on PChem given its largely USD-denominated revenue. While 60%-70% of the group’s cost of operations is naturally hedged to the USD, we estimate that a 10% appreciation in ringgit will translate to a 5% decrease in FY14F earnings.

-  The economic outlook in US and Europe (see Chart 9) currently appears mixed, which partly led to lower crude oil prices which have strong correlations with the margins of PChem’s olefin operations.

-  The stock currently trades at a fair FY14F EV/EBITDA of 6x, which is near PGC’s 6.8x.

Source: AmeSecurities