Petronas Chemicals; Fully Valued; RM6.80
Price Target: RM5.50; PCHEM MK

The management is cautiously optimistic of its prospects in 2012 given the uncertainties in global economic outlook. Heavy plant maintenance activities and methane gas supply limitation has impacted its overall performance in 9M11 despite the favourable selling prices during the financial period due to high oil prices. The company will be looking to strengthen its operations in 2012 in view of the operational issues that it faced in 9M11.

Meanwhile, its 40%-owned associate BASF Petronas Chemicals faced challenges in 3Q11 largely due to poor demand from China and soft market for acrylic acid which is used in the manufacture of plastics, paint formulations and other products. Group's plant utilization stood at 78% in 3Q11 (vs 87% in 2Q11).

Its olefins & derivatives (O&D) segment faced minimal disruptions during the quarter except for a power interruption at Petronas Chemicals Ethylene, registering 89% utilization (vs 97% in 2Q11). Demand was markedly lower in 3Q11, as evident with the 33% q-o-q lower profit. Nevertheless, EBITDA margin remained strong at 34% (vs 39% in 2Q11) due to the relatively healthy selling prices.

PCG was affected by the methane gas supply limitation in Labuan due to operational issues at the upstream stage in 3Q11 (Oct-Dec11). There was no supply of gas from mid-Nov11 to end-Dec11 to the methanol facilities in Labuan. As a result, its fertilizers & methanol (F&M) segment suffered with 67% utilization in 3Q11, compared to 78% in 2Q11 (Jul-Sep11). However, similar to the O&D segment, EBITDA margin for the F&M segment was firm at 40% (vs 48% in 2Q11) as a result of the strong average selling prices.

There is no change to our forecast. We reiterate our Fully Valued call with RM5.50 TP, based on 13x FY12 EPS. We remain cautious of PCG's near-term earnings outlook given the potentially weaker demand for petrochemicals and softer product prices.

Source: HwangDBS Research 29 Feb 2012