Petronas Chemicals; Hold; RM6.48
Price Target: RM6.15; PCHEM MK

Petronas Chemicals (PCHEM)’s stronger net profit in 2Q13 of RM958m (+12.0% y-o-y) was largely driven by favourable product spreads on the back of tight supply availability, cost push factors and firmer end product prices. Segmentally, O&D and F&M segments recorded RM679m (+18% y-o-y, -17% q-o-q) and RM347m (+11% y-o-y, -12% q-o-q) earnings, respectively. O&D segment benefited from wider spreads as sales prices rose while feedstock costs were lower, whilst there were lower product purchases for F&M to mitigate system shortfall. PCHEM also recognised lower associate income (-84.8% y-o-y) due to lower market demand for products as well as feedstock supply limitations for its BASF Petronas plant.

Group operational performance on a q-o-q basis suffered as plant utilisation rates declined 9.6ppts to 83.2%. O&D utilisation rates dropped 12.3ppts q-o-q as some maintenance activities were underway at its MTBE and Glycols plant (which in turn also affected performance of its Derivatives plant). F&M utilisation rates also suffered a 7.6ppts drop q-o-q as a result of operational limitations on its methanol facility. Despite being faced with operational difficulties, PCHEM still delivered resilient performance.

3Q13 planned maintenance activities in Kertih will involve the group’s biggest cracker which will result in lower plant utilisation rates of below 80% for the quarter. In 4Q13 this is expected to normalise, however, the group’s target of 90% plant utilisation rate for the year will be difficult to achieve given 1Q13 and 2Q13 plant utilisation rates of 92.8% and 83.2% respectively.

PCHEM declared an 8 sen DPS in 2Q13. In terms of dividend expectations, PCHEM intends to maintain the payout ratio at 50%. The group’s strong cash pile of RM10.5bn will be reserved for investment in growth projects going forward.

We maintain our Hold call with TP of RM6.15 based on 13x FY14F EPS. PCHEM’s current valuation of 14x FY14F EPS seems expensive compared to its closest peer, PTT Global Chemical which is trading at 8x FY14EPS. Without a visible catalyst, we remain concerned over muted capacity growth at PCG for the next three years as this would expose PCHEM to volatile oil prices.

Source: HwangDBS Research - 26 Aug 2013