We maintain our BUY call on Petronas Chemicals Group (PChem)with an unchanged fair value of RM8.30/share, pegged to a CY12F EV/EBITDA of 9x' which is at a 15% premium to PTT Global Chemicals' 7.8x.

We maintain FY12F-FY14F earnings forecasts, which incorporatean average olefin/polymer and fertilizer/methanol price growth of 12% and 8%,respectively. 

PCG's 9MFY Dec 11 net profit of RM2,621mil was below expectations,coming in at 7% below both our forecast and consensus' annualised 12MFY11projection of RM3,777mil. The group declared a final dividend of 8 sen/share,to raise the period's total dividend to 16 sen ' in line with our expectations.This translates into a payout ratio of 48%, close to our FY12F-FY14F assumptionof 50%.

PCG's December quarter fell 36% QoQ to RM735mil due to:- (1)an average 6% decline in overall product prices, (2) 15% contraction in salesvolume due to lower demand, methane gas constraints and electricityinterruption at the group's ethylene cracker plant, and (3) halving ofassociate contribution due to lower margins and methane gas supply volume.

YoY, the group's 9M FY Dec 2011 net profit rose 27% in tandemwith a 29% increase in overall product prices, partly offset by:- 1) a 7%volume contraction arising from plant maintenance and methane gas constraints,2) weaker US dollar, and 3) higher associate tax rates.Olefins & polymersaccounted for 72% of PCG's 9M FY Dec 2011 net profit, down YoY from 92% in theprevious period due to the fertiliser/methanol's 4.4x surge vs olefin/polymer's5% increase. This stemmed from higher product prices and volume which alsoimproved the fertiliser/methanol's net margins by 19ppts YoY vs. the olefin/polymer's1ppts decline.

Olefin/polymer and fertilizer/methanol prices have significantlyrisen since the beginning of the year, partly out of steady global demand, amidexpectations of tighter supplies ahead of a number of Japanese and Korean crackersundergoing a seasonal maintenance period in 2Q2012. 

Since the beginning of January this year, polyethylene priceshave surged 18%, methanol up 15%, benzene prices 12%, andpolypropylene/paraxylene by 12%. With crude oil prices trading at aboveUS$100/barrel, we believe PChem, given its low feedstock structure, is poisedto benefit from a higher global oil price regime, partly driven by geopoliticaluncertainties in the Middle-East, especially in Iran and Syria.

The stock currently trades at an attractive FY12F EV/EBITDA of7.8x, which is half of Taiwan's Formosa Petrochemicals' 15x. We understand thatPChem's foreign shareholding remains in the mid-teens.

Source: AmeSecurities