INVESTMENT HIGHLIGHTS

• Petronas Chemicals Group Bhd’s (PChem) 2QFY18 earnings expanded by +34.1%yoy to RM1.37b

• 2QFY18 PUR at 95% due to good feedstock and asset reliability

• Product volume growth of +7%yoy

• Average product prices increased on strengthening global crude oil prices

• Declared an interim dividend of 14sen

• Maintain NEUTRAL with unchanged TP of RM8.90 per share

95% PUR from better plant performance. PChems’ 2QFY18 earnings increased by +34.1%yoy to RM1.37b. The commendable profit is premised on strong revenue growth of +19.6%yoy to RM4.73b. The upbeat sales figures are a result of: (i) Plant utilisation rate (PUR) of 95%; and (ii) higher average selling prices (ASP). Product volume grew by +7%yoy to 2,689MT for 2QFY18 compared with 2,514MT in 2QFY17. Annual production volume is forecasted to be above 10,000MT per annum for FY18.

Earnings within estimates. 6MFY18 normalised earnings (excluding loss of partial divestment of subsidiary and forex losses) met our and consensus expectations at 56% and 58% of FY18 full year earnings estimates respectively. Overall PATAMI margin sustained at a healthy level of 29% for the quarter.

Olefins & derivatives. 2QFY18 segment revenue and profit grew by +8.8%yoy and +9.6%yoy respectively. Segment PUR was at 95% while average product prices increased by +10% in-line with strong crude oil prices. Ethylene production for the quarter was at 229kMT (- 11.6%yoy) due to maintenance works conducted at PC Olefin.

Fertilisers & Methanol. Both segment revenue and profit surged by +45.1%yoy and by +70.1%yoy due to (i) PUR 99%; (ii) higher average product prices from strong crude oil prices; and (iii) strong sales volume. The surge in revenue and profit is attributable to both increased contribution from PC Fertiliser Sabah (SAMUR). Urea production was at 646kMT (+20.9%yoy) while methanol production was at 549kMT (-3.2%yoy).

Commendable PUR despite turnaround activities. Management guided that FY18 will be another year with heavy turnaround activities (TA). Despite this, the average PUR for the group is expected to remain above 90%, similar to that of FY17. The bulk of the heavy turnaround will happen in 3QFY18 where PUR is expected to be below 90% while PUR for 2HFY18 is expected to drop to 85% (PUR for 2QFY18 is currently at 95%). In 3QFY18, TA has been completed on its ethylene cracker while in 4QFY18, TA will be conducted on its fertiliser and megamethanol Plant 2 facilities. Management guided that for FY18, CAPEX to be spent on TA will be similar to that of FY17 and going forward into FY19, the CAPEX will be 50-60% of its FY18 CAPEX.

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. We are maintaining our NEUTRAL recommendation with an unchanged target price of RM8.90 per share. Despite the overall stable outlook, we opine that earnings growth is limited for FY18 and going into FY19 due to the heavy TA and lower PUR albeit >90% as production volume is expected to remain constrained. We are expecting earnings to remain relatively flat year-over-year due to this. Our target price is derived from PER19 of 16x pegged to EPS19 of 55.6sen.

Source: MIDF Research - 16 Aug 2018