- We maintain our HOLD call on Petronas Chemicals Group (PChem) with a lower fair value of RM5.85/share (vs. RM6.95/share previously), pegged to a lower FY15F EV/EBITDA of 7.5x (from 8x) – a 20% premium to Thailand’s PTT Global Chemicals’ (PGC) 6.2x.

- We cut PChem’s FY14F-FY16F earnings by 13% due to a 4ppts cut in our average product price assumption to account for lower petrochemical prices going forward against the backdrop of declining crude oil prices. Prices for WTI crude oil, naphtha, benzene, granular urea, paraxylene, polyethylene, methanol and polypropylene have declined by 5%-20% since 30 June 2014.

- PChem’s 9MFY14 net profit of RM1,964mil came in below expectations, accounting for 62% of our previous FY14F earnings and 59% of consensus.

- After our earnings cut, our FY14F-FY16F net profits are 11%-12% below street estimates. The group also did not declare any interim dividend for 3QFY14, as expected.

- The group’s 3QFY14 net profit has improved by 19% QoQ to RM661mil, largely due to higher plant utilisation of 90% (vs. 65% in 2Q) for olefins and derivatives (O&D) which experienced lower statutory turnaround and maintenance activities; and improved prices for ethylene glycols, urea and aromatics.

- However, this was partly offset by the fertilisers and methanol (F&M) division where plant utilisation dropped from 85% in 2QFY14 to 64% in 3QFY14, due to methane gas supply constraints which was caused by equipment issues at the upstream supplier’s surface facilities in Labuan.

- On a YoY comparison, 9MFY14 revenue fell 10% to RM10,696mil due to:- (i) lower price spreads; (ii) lower volumes of higher-margin products; and (iii) significant volume contraction from three regulatory turnaround shutdowns at the smaller Kerteh cracker, polyethylene and MTBE plants, as well as planned maintenance activity at the aromatic facility, which caused net profit to fall by 27%.

- Nevertheless, we expect 4QFY14 to continue to improve QoQ with the completion of major turnaround schedules for the O&D segment, although this could be negated if the gas supply disruptions remain protracted. Since 30 September this year, petrochemical prices have further softened with polyethylene falling by 7%, paraxylene 16%, methanol 14%, urea 13% and benzene 16%.

- The stock currently trades at a fair FY15F EV/EBITDA of 7.9x, which is above PTT Global Chemicals’ 6.2x.

Source: AmeSecurities