- We upgrade our call on Petronas Chemicals Group (PChem) to HOLD from SELL with a higher fair value of RM6.95/share (from RM5.50/share previously), pegged to a rolled forward FY15F EV/EBITDA of 8x (vs. an earlier 8.5x FY14F) – a 30% premium to Thailand’s PTT Global Chemicals’ (PGC) 6.3x.

- We have raised PChem’s FY14F earnings by 18% due to a 10ppt increase in plant utilisation rate assumption from 80% to 90%, with slight adjustments to FY15F-FY16F earnings.

- The group’s 1QFY14 net profit of RM749mil came in above our expectations, accounting for 28% of our earlier FY14F forecast due to higher-than-expected volume impact from the utilisation recovery of the Kertih main cracker following its turnaround activities in 4QFY13. But the result was below street’s estimates of RM3,647mil, As expected, the group did not declare any interim dividend.

- PChem’s 1QFY14 revenue rose by 14% QoQ to RM3,805mil, largely due to the turnaround following the the shutdown of the Kertih main cracker plant during the quarter, together with a slight improvement in utilisation for the Labuan methanol 2 plant and Bintulu fertilizer facility.

- Overall plant utilisation level has risen from 66% in 4QFY13 to 80%. This utilisation recovery mostly stemmed from the olefin & polymer division (O&P), which rose to 97% in 1QFY14 from 67% in 4QFY13. The fertiliser & methanol (F&D) division’s utilisation improvement was more muted, rising by 2ppt to 67% as the Labuan methanol plant 2 only restarted in mid-1QFY14 after undergoing extensive maintenance work.

- Together with higher QoQ margins for the O&P (+9ppt) and F&D (+3ppt) divisions as well as the absence of a RM97mil charge in 4QFY13 to settle the termination of utilities and electricity for its discontinued vinyl business, the group’s 1QFY14 net profit rebounded by 66% to RM749mil.

- We highlight that the group will still undertake another statutory turnaround maintenance for its second smaller Kerteh cracker plant in 2QFY14, which could cause the plant utilisation rate for the O&D to drop from 97% to 80%. This could be partly offset by a higher utilisation rate of 94% (from 67%) for the F&D division in 2QFY14, but which will subsequently decline due to maintenance activity for the smaller Labuan methanol plant 1 in 3QFY14.

- Since 31 March 2014, WTI crude oil has declined by 2%, ethylene by 4% and methanol by 1%, but naphtha rose by 1%, polyethylene by 2% and paraxylene by 4% while urea was unchanged (See charts 3 to 6). The price outlook for petrochemical prices appeared stable for the near term, although there may be some supply-driven softness expected for urea and aromatics.

- The stock currently trades at a fair FY15F EV/EBITDA of 7.7x, which is 22% above PGC’s 6.3x and ahead of PChem’s peak premium of 26% against PGC back in June 2012.

Source: AmeSecurities