- We maintain our HOLD rating on Petronas Chemicals (PChem) with a lower fair value of RM5.80/share (from RM6.20/share previously), pegged to an FY15F EV/EBITDA of 8.5x.

- We cut our FY15F-FY16F earnings by 9%-12% due to lower average product price assumptions, as PChem’s 1HFY15 net profit missed expectations, accounting for 42% of our previous FY15F earnings and 43% of consensus’. The group also declared an interim dividend of 8 sen/share (2QFY14: 8 sen).

- PChem’s 1HFY15F earnings declined by 11% YoY mainly due to an 18% decline in profits from its olefins and derivatives (O&D) segment, as average prices trended lower in tandem with the decline in crude oil and naphta prices.

- On the other hand, the fertilisers and methanol (F&M) segment’s profit saw a marginal increase of 2%, due to an improvement in the segment’s plant utilisation from 76% to 80% and lower tax expense. However, this was offset by lower urea prices as a result of additional supply from China due to more competitive export tax structure and lower ammonia prices as regional producers resumed operations.

- PChem’s overall plant utilisation in 2QFY15 decreased to 78% from 90% in 1QFY15, as the group undertook a statutory turnaround activity at its Gurun urea facility during the quarter. The group’s 1HFY15 plant utilisation stood at 84% vs. 78% in the previous year due to stronger plant reliability and lower level of statutory turnaround activities. The management expects plant utilisation to remain at mid-80% for the year.

- The outlook O&D market is expected to remain uncertain in the near term given the uncertainty in crude oil and naphta prices. F&M will also remain challenging due to higher supplies of fertilisers anticipated from China following changes in their export tax structure. However, the group expects better feedstock supply reliability when the Dalak pipeline comes into operations in 1QFY16.

- The SAMUR plant, which will increase production capacity from 1.4mmtpa to 2.6mmtpa, is on track for completion by 1QFY16. Additionally, PChem will incur borrowings going forward to fund its future projects, including RAPID, with a maximum net debt/EBITDA level of 2x.

- The stock is currently trading at an FY15F EV/EBITDA of 9.7x, which is above PTT Global Chemicals’ 6.6x.

Source: AmeSecurities Research - 10 Aug 2015