-We maintain our HOLD call on Petronas Chemicals Group (PChem) with an unchanged fair value of RM6.95/share, pegged to an unchanged FY15F EV/EBITDA of 8x – a 20% premium to Thailand’s PTT Global Chemicals’ (PGC) 6.6x.

-Likewise, we maintain PChem’s FY14F-FY16F earnings on expectations that the group’s 2HFY14 profit will rebound from the higher plant utilisation following heavy plant maintenance at its facilities in Kerteh, Terengganu.

-The group’s 1HFY14 net profit of RM1,304mil came in below expectations, accounting for 41% of our FY14F earnings of RM3,172mil and 36% of street’s RM3,578mil due to lower product price spreads and significant volume contraction from 3 regulatory turnaround shutdowns at the smaller Kerteh cracker, polyethylene and MTBE plants as well as planned maintenance activity at the aromatic facility. As expected, the group declared an interim single-tier dividend of 8 sen.

-As highlighted in our earlier reports, PChem’s 2QFY14 revenue contracted by 12% QoQ to RM3,341mil, largely due to lower prices for olefins, derivatives and methanol coupled with average plant utilisation dropping from 80% to 76% due to the turnaround and planned maintenance shutdowns.

-Hence, the plant utilisation for olefins & derivatives (O&D) fell from 97% in 1QFY14 to 65% in 2QFY14 but fertiliser and methanol (F&M) rose from 67% to 85% with the completion of the Labuan methanol plant 2 maintenance work.

-On a YoY comparison, 1HFY14 revenue fell 14% to RM7,147mil due to lower product prices and decreased volume output, which caused net profit to fall by 37%.

-The group expects the smaller Labuan methanol plant 1 to undergo extensive plant maintenance work from August 2014 until mid-October 2014 while gas constraints will resurface again due to upstream disruptions caused by MISC’s FPSO Kikeh, which is only expected to complete the repairs to its power transformer by August this year.

-Nevertheless, the plant utilisation for the O&D segment, which has completed its major turnaround schedules, could recover from just 65% to over 90% in 2HFY14 while F&D could maintain at mid-80% against the backdrop of gas supply disruptions.

-Since 30 June 2014, WTI crude oil has declined by 8%, naphtha by 6%, benzene by 3% and granular urea by 8%, but paraxylene rose by 9%, polyethylene by 1% and polyethylene by 1% while methanol and polypropylene was unchanged (See charts 3 to 6). The price outlook for petrochemical prices still appear mixed with ethylene expected to strengthen slightly while aromatics and urea will be under pressure from rising supply from China in 2HFY14.

-The stock currently trades at a fair FY15F EV/EBITDA of 7.9x, which is 20% above PGC’s 6.6x with decent dividend yields at 2.5%.

Source: AmeSecurities