INVESTMENT HIGHLIGHTS

• Petronas Chemicals Group Bhd’s (PChem) 1QFY17 reported earnings surpassed RM1b mark

• Average selling prices improved y-o-y by +22%

• Achieved plant utilisation rate of 99% for 3MFY17

• Anticipating subsequent quarters to register lower PUR due to planned maintenance

• Maintain NEUTRAL with revised TP of RM7.58 per share

Earnings boost from high ASP. PChem’s 1QFY17 earnings more than doubled, nearly reaching RM1.3b. The surge in earnings is a combination of: (i) high plant utilisation rate (PUR) of 99% (compared with 92% in 1QFY16); (ii) strong average selling prices of its products which grew by +22%yoy and; (iii) higher production and sales volume (+16%yoy).

Earnings in-line. Although 3MFY17 PATAMI of RM1.295b makes up 40.3% and 39.1% of our and consensus full year FY17 earnings forecasts, we are expecting earnings for the subsequent quarters to taper down due to planned statutory turnaround activities and softer product prices.

Olefins & derivatives. The O&D 1QFY17 segment revenue and EBITDA increased by +43.1%yoy and by +102.4%yoy respectively due to full plant utilisation rate (PUR) of 100% compared with that of 1QFY16 at 97%. ASPs increased by +25% in line with recovery in crude oil prices in 1QFY17 along with high sales volume. Moving forward, the O&D market is expected to soften with ASPs coming off as demand weakens post-restocking activities.

Fertilisers & Methanol. Similar to the O&D segment, 1QFY17 segment PUR also recorded improvements to 96% compared with 89% in 1QFY16. The improvement in PUR is largely due to improved methane supply at its methanol facilities. ASPs also surged by +41% due to higher demand and tighter regional supply. The fertiliser segment is expected to stay firm from seasonal South Asia and India demand but Methanol prices expected to weaken due to lower demand from China.

Almost perfect PUR. PChem’s group PUR for 3MFY17 was at 99% due to high feedstock supply and superior plant reliability. This is above the world-class performance threshold of +85%

Impact on earnings. Maintain earnings estimates at this juncture as we are expecting earnings to taper down for subsequent quarters of FY17 due to lower PUR and softer overall ASPs.

Cautiously optimistic on FY17 earnings. We however, remain cautiously optimistic on FY17 earnings estimates as there will be approximately five turnaround activities in FY17 in particular in Kertih (3Q17) which could take between 50-55 days. The PUR for FY17 is expected to be approximately 87-90% – above the world-class standard but expected to lag that of FY16

Recommendation. We are maintaining our NEUTRAL recommendation on PChem with a revised target price of RM7.58 per share. We roll forward our valuation base year to FY18 with a target PER18 of 18x pegged to EPS18 of 42.1sen. The target PER18 for the company is based on its average quarterly rolling PER since its listing. It is however worthwhile noting that PChem’s PER is a premium over its regional competitor’s average PER of only 14x due to the company’s relatively cheaper and more reliable feedstock advantage from PETRONAS

Source: MIDF Research - 16 May 2017