INVESTMENT HIGHLIGHTS

• PChem’s 3QFY17 earnings increased by +2.5%yoy to RM913m

• 3QFY17 PUR at 86% due to heavy turnaround activities in Kerteh as anticipated

• Average product prices increased on strengthening global crude oil prices

• Overall group 9MFY17 plant utilisation rate at 91%

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

• Maintain BUY with unchanged TP of RM8.18 per share

Earnings supported by higher ASPs. Petronas Chemicals Group Bhd’s (PChem) 3QFY17 earnings increased by +2.5%yoy to RM913m. The commendable profit is premised on strong revenue growth of +12.6%yoy to RM4.0b. The upbeat sales figures are as result of: (i) strong production volume (boosted by SAMUR); (ii) higher average selling prices (ASP) by +4%; and (iii) stronger USD/MYR during the quarter. The company’s overall 3QFY17 and 9MFY17 sales volume (kmT) increased by +10% and +2% respectively.

Earnings within our estimate. Cumulative 9MFY17 earnings of RM3.172b came in within our estimate accounting for 76.7% of our FY17 earnings forecast, but exceeded consensus estimate by a variance of more than +10%. We believe that 4QFY17 will continue to display strong showings as the plant utilisation rate (PUR) will be better owing to fewer plant turnaround activities (refer to table on pg.2)

Olefins & derivatives. 9MFY17 segment revenue and profit increased by +21.2%yoy and by +46.9%yoy respectively. This is despite the company recording lower segment PUR of 92% compared with that of 9MFY16 at 99% - major turnaround activity at supplier side and downstream PC Olefin plants. ASPs were firmer due to rising global crude oil prices. O&D derivatives market is expected to be stable in the near term from higher feedstock prices, but partially offset by seasonally lower demand from China. 9MFY17 segment profit margin expanded by +4.5%ppts to 25.4%.

Fertilisers & Methanol. Similar to the O&D segment, 9MFY17 segment PUR is also lower at 90% compared with 94% in 9MFY16 due to the earlier anticipated higher level of maintenance activities. Overall ASPs however, continue to increase in particular for methanol following better demand.

Ammonia and urea prices were weaker from oversupply in the market. 9MFY17 segment profit margin expanded by +6.3%ppts to 28.0%.

Commendable PUR despite turnaround activities. For 4QFY17, we are expecting another turnaround activity for its Plant 1 PC Methanol which will bring the overall PUR for the year to around >90%. This is above the world-class performance threshold of +85%. Moving forward, the PUR in FY18 is also targeted to be above >90%.

Impact on earnings. No changes to earnings estimates.

Remain sanguine on the company. As the product prices are expected to remain stable and firm in the near term coupled with stronger PUR moving forward, we remain sanguine on the company whilst expecting it to report FY17 earnings in excess of RM4b for the year.

Recommendation. We are maintaining our BUY recommendation on Pchem with an unchanged target price of RM8.18 per share. Our target price is based on a sector average of 15x pegged to EPS18 of 54.5sen.

Source: MIDF Research - 10 Nov 2017