Petronas Chemicals (PCHEM)'s FY12 net profit was above our expectation but within consensus estimate, making up 119.1% of our and 96.7% of consensus' fullyear figures. As we are revamping our model in line with a reallocation of internal resources, we upgrade our earnings forecast by 6.8% for FY13 and 5.0% for FY14. We also upgrade the stock to NEUTRAL from SELL, with FV revised to RM6.40, pegged to 12x FY13 EPS.

Above our estimates. PCHEM registered a revenue growth of 2.2% y-o-y due to better operational performance, driven by lower maintenance activities at its olefin and derivatives segment (-0.9% y-o-y) and improved gas supply availability at its fertilizers and methanol segment (+11.6% y-o-y). Despite growing its top-line, the group's net profit dipped 6.7% y-o-y due to narrower product spreads and lower contribution from an associate company amid challenging market conditions. The group also included a one-off discontinuation expense amounting to RM490m for its vinyl business, which was partially offset by a positive tax incentive of RM432m at one of its subsidiaries.

Solid balance sheet. PCHEM had repaid all its borrowings as at 31 Dec 2012 and is now sitting on a cash pile of RM9.3bn as of the same date. The group has also declared a single tier final dividend of 14 sen per share for FY12. This brings the total dividends paid in FY12 to 22 sen, representing a dividend payout of 50% and a yield of 3.5%. in view of its solid balance sheet, we are projecting a 50% dividend payout for FY13, which will offer investors a yield of about 4.3%, based on yesterday's closing share price.

Upgrade to NEUTRAL. Following an internal coverage revamp, we are revisiting our financial model and revising some assumptions. As key factors such as: i) higher crude oil prices, which in turn support higher petrochemical prices, and ii) healthy supply-demand balance continue to work in PCHEM's favour, we have a positive view on the group's earnings outlook for 2013. This prompts us to upgrades our core earnings by 6.8% for FY13 and 5.0% for FY14. However, given the limited 2.4% upside to our valuations (12x FY13 EPS), we are merely upgrading the stock to a NEUTRAL from a SELL.

 Source: OSK