• Petronas Chemicals Group Bhd’s (PChem) 2QFY17 earnings more than doubled to RM964m

• Overall group 1HFY17 plant utilisation rate (PUR) at 94%

• Average product prices increased

• 3QFY17 to record lowest PUR for the year as heavier turnaround activities in Kertih planned

• Average PUR for FY17 still expected to be circa 90%

• Upgrade to BUY with revised TP of RM8.18 per share

Earnings boost from high ASP. PChem’s’ 2QFY17 earnings more than doubled to RM964m. This is premised on a +23.6%yoy jump in revenue to RM3.959b. The commendable sales numbers are a result of: (i) better-than-expected PUR at 90% for the quarter; (ii) higher average selling prices; (iii) higher sales volume of +14%yoy and; (iv) lower operating expenses.

Earnings exceed expectations. Cumulative 6MFY17 earnings of RM2.404b exceeded our and consensus expectations, accounting for 67% and 75% our full year earnings estimates respectively. We were previously expecting overall PUR to be lower coupled with product prices softening in 2QFY17 onwards.

Olefins & derivatives. The O&D 1HFY17 segment revenue and profit increased by +31.4%yoy and by +100%yoy respectively due to higher plant utilisation rate (PUR) of 97% compared with that of 1HFY16 at 95%. ASPs also increased (+25% in 1QFY17 and +6% in 2QFY17) in line with recovery in crude oil prices in 2QFY17 along with stronger USD. O&D derivatives market is expected to be firm in the near term from tight supply, increased demand and scheduled statutory turnarounds. 1HFY17 segment profit margin expanded by +9.3%ppts to 26.9%.

Fertilisers & Methanol. Similar to the O&D segment, 1HFY17 segment PUR also managed to sustain at 92% compared with 93% in 1HFY16 despite higher level of maintenance activities. ASPs also continue to increase in 1HFY17 (+41% in 1QFY17 and +5% in 2QFY17) due to higher product prices for urea and methanol. 1HFY17 segment profit margin expanded by +8.4%ppts to 29.5%.

Commendable PUR despite turnaround activities. PChem’s group PUR for 1HFY17 was at 94% due to stable feedstock supply and with the commencement of SAMUR in May 2017. This is above the world-class performance threshold of +85%.

Impact on earnings. Due to the better-than-expected results, ASPs, PUR and also lower operating expenses, we are increasing our FY17 and FY18 forecasts by +28.9% and +29.4% respectively.

We turn optimistic on stock. As the product ASPs are strengthening and stabilising especially for the O&D segment and as the sales volume continue to pick up, we turn optimistic on PChem expecting FY17 earnings to exceed RM4b. In addition, with the planned turnaround activities, the PUR is still expected to be around 90%.

Recommendation. We are upgrading our stance on Pchem to BUY (from Neutral) with a revised target price of RM8.18 per share. Our target price is based on a sector average of 15x pegged to EPS18 of 54.5sen. We believe that the share price weakness over the past three months offers investors attractive potential upside.

Source: MIDF Research - 11 Aug 2017