- We downgrade our call on Petronas Chemicals Group (PChem) from HOLD to SELL with a lower fair value of RM5.50/share (from RM7.20/share previously), pegged to a FY14F EV/EBITDA of 8.5x – which is at a 30% premium to Thailand’s PTT Global Chemicals’ (PGC) 6.5x.

- We have cut PChem’s FY14F-FY15F earnings by 5%-31% due to a 15% cut in sales volume in FY14F, which translates to an overall plant utilisation rate of 80% compared to an earlier 90%.

- The group’s FY13 net profit of RM3,146mil came in 16% below our expectations and 14% below street estimates, due to higher than expected volume impact from plant maintenance activities in the Kertih main cracker, and upstream gas supply shortfalls at the Labuan methanol plants. PChem’s final dividend of 12 sen (-2 sen YoY) was below expectations as well, bringing total dividend to 20 sen vs. 22 sen in FY12.

- PChem’s 4QFY13 revenue fell by 5% QoQ to RM3,349mil largely due to reduced sales volumes from the shutdown of the Kertih cracker plant, which is still undergoing major statutory maintenance work. Also, the Labuan methanol and fertiliser plants are also underwent maintenance activities.

- All in all, we estimate that the overall plant utilisation levels have fallen from 69% in 3QFY13 to below 60% in 4QFY13. Including a RM97mil charge to settle the termination of utilities and electricity for its discontinued vinyl business, the group’s 4QFY13 net profit fell by 29% QoQ to RM450mil.

- Excluding losses from the discontinuance of the vinyl business in FY12, the group’s FY13 net profit fell 22% YoY, in tandem with a 8% revenue contraction due to the impact of lower plant utilisation rates.

- We have adopted a more conservative outlook for plant utilisation rates in FY14F as the group will be undertaking a major maintenance activity for its smaller cracker plant and its related downstream facility, MTBE, fertiliser, methanol and aromatics plants in 2014. Additionally, in 1QFY14, the Labuan methanol facility will face gas supply constraints due to the shutdown of Petronas’ upstream facilities to conduct offshore technical works.

- Meanwhile, the price outlook for petrochemical prices appeared mixed. Since 30 Sept 2013, WTI crude oil has declined by 2%, paraxylene by 9% while naphtha rose by 4%, polyethylene by 6%, methanol by 13%, and urea by 3% (See Charts 3-6).

- The stock currently trades at a pricey FY14F EV/EBITDA of 11x, which is 69% above PGC’s 6.5x and ahead of PChem’s peak premium of 26% to PGC back in June 2012.

Source: AmeSecurities