• PCG’s FY17 full year core earnings grew 33% yoy to RM4.2bn, in line with ours and consensus FY17 estimate at 102% and 105% respectively.

• Declared higher 2nd interim DPS of 15 sen bringing FY17 full year DPS to 27 sen.

• Reiterate BUY on PChem with unchanged DCF-derived TP at RM10.00. We continue to favor PChem as proxy to sustained global GDP growth and crude oil recovery.

Lower profits on higher effective tax rate

PCG’s 4Q17 core earnings fell 4.4% yoy to RM1.01bn mainly due to higher effective tax rate. The higher tax rate was possibly due to lower ethane-based products which enjoy low tax under Global Incentive for Trading (GIFT). Operating profits, however, improved 11.0% yoy underpinned by favourable product spread as well as additional volume from the SAMUR plant which began operations in May 2017. Overall, FY17 core earnings jumped by a whopping 33% to RM4.2bn and were within our estimates.

Different sales mix dragged O&D margin

Despite higher O&D revenues, EBITDA margin dropped by 54bps to 32.4% due to lower ethane-based product volume following lesser ethylene production during derivatives plant maintenance in 3Q17. Meanwhile, F&M sales grew by 68% boosted by higher urea price and volume from SAMUR, expanding F&M’s EBITDA margin by 44bps to 42.7%.

Maintaining operational plant efficiencies

During 4Q17, plant performance was sustained at 93%. For FY18, the company expects to achieve similar PU due to scheduled maintenance at the ethylene cracker, Labuan Methanol Plant 2 and Asean Bintulu Fertiliser complex in 2H18.

Higher dividend declared

A second interim DPS of 15 sen was declared, bringing total DPS for FY17 to 27 sen (FY16: 19 sen). This implies 52% payout ratio, in line with its policy of 50% PATAMI and currently yields 3.3%.

Reiterate BUY recommendation

We are delighted with PChem’s outstanding 33% core earnings growth as it reaffirms our view on the stock. However, as we think there is limited upside to crude oil price, we keep our FY18/FY19 earnings forecast unchanged. Hence, we maintain our DCF-derived TP at RM10.00 which implies FY18E PE of 19.3x. Our DCF is based on WACC of 8.0% and LT growth rate of 0%.

Source: BIMB Securities Research - 21 Feb 2018