Petronas Chemicals Group; Hold
Price Target: RM6.15; PCHEM MK

Management cited higher product prices in the O&D segment and higher sales volume in the F&M segment for the improved 1Q13 performance. Product prices have been driven by limited market supply as curtailments and major slowdowns have affected global production. In addition, feedstock costs have been relatively stable resulting in better spreads overall.

Nevertheless,near-term outlook seems challenging on most fronts with prices expected to stabilize as a result of increasing supply from new plants in the region. Softening downstream demand from key markets such as China and India may also weaken prices in the future. However, robust demand is expected for certain products such as ammonia and methanol as a result of supply shortages and seasonal demand.

Plant utilization rates have improved to 93% for 1Q13 (vs 89% in 4Q12 and 90% in 1Q12) on the back of improving gas supply situation for methanol plants and lower maintenance activities. We expect major turnaround and maintenance activities in 3Q13 especially the PC Olefins plant to affect its utilization rates given that the cracker accounts for the bulk of its cracking capacity. PCG has also budgeted RM2bn capex this year for its SAMUR project, on top of its usual maintenance capex of RM900m.

Our earnings forecast for FY13 remains intact as our projection has factored in a major turnaround and maintenance activities. We maintain our HOLD rating based on 13x FY14 EPS. We believe that the petrochemical market remains challenging given the ample supply and slowing downstream demand which may result in shrinking margins.

Source: HwangDBS Research - 29 May 2013