INVESTMENT HIGHLIGHTS

• Petronas Chemicals Group Bhd’s (PChem) 1QFY18 earnings expanded by +6%qoq to RM1.1b

• 1QFY18 PUR at 100% due to good feedstock and asset reliability

• Product volume growth of +11%yoy

• Average product prices increased on strengthening global crude oil prices

• Downgrade to NEUTRAL (upside bias) with revised TP of RM8.90 per share

100% PUR from better plant performance. PChems’ 1QFY18 earnings increased by +6%qoq to RM1.1b. The commendable profit is premised on strong revenue growth of +5.5%yoy and +4.5%qoq to RM4.95b – highest ever achieved so far. The upbeat sales figures are a result of: (i) PUR of 100% and; (ii) higher average selling prices (ASP). The growth in revenue was however undeterred by weaker USD. Product volume grew by +11%yoy to 2,798MT for 1QFY18 compared with 2,513MT in 1QFY17. Annual production volume is forecasted to be above 10,000MT per annum for FY18.

Earnings within estimates. 3MFY18 normalised earnings (excluding loss of partial divestment of subsidiary and forex losses) met our and consensus expectations at 25% and 26% of FY18 full year earnings estimates respectively. Overall PATAMI margin sustained at a healthy 22% for the quarter.

Olefins & derivatives. FY17 segment revenue and profit increased by +6.1%qoq and by +12.9%qoq respectively. Segment PUR was at 100% while average product prices increased by +10% in-line with strong crude oil prices. Ethylene production for the quarter was at 263kMT (+2.7%yoy).

Fertilisers & Methanol. Both segment revenue and profit surged by +22.0%yoy and by +25.1%yoy due to (i) PUR 99.5%; (ii) higher average product prices from strong crude oil prices and; (iii) strong sales volume. The surge in revenue and profit is attributable to PC Fertiliser Sabah (SAMUR). Urea production was at 643kMT (+78.6%yoy) while methanol production was at 540kMT (+6.9%yoy)

Commendable PUR despite turnaround activities. Management guided that FY18 will be another year with heavy turnaround activities. Despite this, the average PUR for the group is expected to remain above 90%. The bulk of the heavy turnaround will happen in 3QFY18 where PUR is expected to be below 90% while PUR for 1HFY18 is expected to remain high (PUR for 2QFY18 is currently at 94%). For 3QFY18, TA will be conducted on its cracker, fertiliser and methanol facilities.

Impact on earnings. No changes to earnings estimates.

Remain sanguine on company. Moving forward into the year, the group’s overall PUR will be under stress owing to heavy turnaround activities. Nonetheless, management still expects total product volume output to be above 10kMT, comparable with that of FY17. In addition, management also expects profits to be on par with FY17 premised on strong demand, strong asset reliability albeit softening product prices.

Recommendation. Year-to-date, Pchem’s share price has appreciated by +13%, while valuations are currently at a two-year high. With heavy TA expected this year and earnings expected to remain relatively flat year-over-year, we are downgrading our recommendation to NEUTRAL with an upside bias. We roll forward our valuation base year to FY19 with a revised target price of RM8.90 per share. Our target price is derived from PER19 of 16x pegged to EPS18 of 55.6sen.

Source: MIDF Research - 22 May 2018