In  its  conference  call  with  investors  yesterday,  Petronas  Chemicals (PCHEM)  attributed  the  stronger  than  expected  1QFY13  results  to favorable  market  conditions.  While  the  global  outlook  for petrochemicals  is  encouraging,  we  maintain  our  NEUTRAL  call  on  the stock, with a higher FV of MYR 6.55 as we roll over our valuation to 12x its forward earnings.  

- Good  start  to  FY13.  PCHEM’s  Management  believes  that  the company’s  1QFY13  results  trumped  consensus  estimates  due  to favourable  market  conditions  and  firmer  product  prices  despite  having ceased  its  domestic  vinyl  business  during  the  quarter.  The  favourable earnings  were  also  supported  by  a  better  plant  utilization  rate  of  92.8% compared to 88.5% in 4QFY12 and 89.8% in 1QFY12.  

- Olefins  &  derivatives  division  registers  strong  plant  utilization rates.  PCHEM’s olefins & derivatives division  registered  its  strongest plant  utilization  over  the  last  five  quarters  at  99.3%,  which  resulted  in higher revenue and a stronger EBITDA margin of 38% compared to 31% in  4QFY12  and  36%  in  1QFY12.  However,  we  believe  that  the  strong utilization  rates  will  be  short-lived  due  to  the  upcoming  scheduled maintenance shutdowns.  

- Improving gas supply for methanol facility. PCHEM’s other division – fertilizers  and  methanol  –  also  registered  its  strongest  utilization  rate over  the  last  five  quarters  at  88.0%  due  to  improving  gas  supply  for  its methanol  facility.  Average  prices  also  rose  by  some  10%  during  the quarter and this resulted in a stronger EBITDA margin of 45%, vs 42% in 4QFY12 and 42% in 1QFY12.  

- Maintain  NEUTRAL.  While  the  global  outlook  for  petrochemicals  is encouraging,  we  retain  our  NEUTRAL  recommendation  on  the  stock. Our  FV  is  raised  to  MYR6.55  (previously  MYR6.40)  as  we  roll  over  our valuation to 12x of its forward earnings, which is at a 30% premium to its peers  within  the  region  which  are  trading  at  an  average  9x  FY13  EPS. We  believe  that  the  premium  is  justifiable  due  to  the  Group’s relatively cheaper feedstock advantage.

Source: RHB