Petronas Chemicals’ 1HFY14 core earnings of MYR1,302m came in at 35.2%/36.3% of our/consensus estimates. We deem this in line with our expectations as we take into account its three scheduled major plant turnarounds in 2QFY14. We keep our FY14/15F earnings estimates unchanged at this juncture and maintain our SELL recommendation, with an unchanged FV of MYR6.11.  
 
1HFY14 results in line with expectations. Petronas Chemicals’ 1HFY14 revenue fell 14.2% y-o-y to MYR7,147m. Its olefin and derivative (O&D) segment saw a 14% y-o-y decline in revenue to MYR5,102m due to a lower plant utilisation rate. Meanwhile, its fertilisers and methanol (F&M) segment revenue declined 12.9% y-o-y to MYR2,063m, dragged down by lower ASPs. All in, 1HFY14 core earnings fell 36% y-o-y to MYR1,302m.

Better 2HFY14 outlook.  The three major turnarounds in 2QFY14 dragged down the O&D plants utilisation rate to 65%, compared with a 97% utilisation rate in 1QFY14 when there was no major turnaround. We gather that there will be no more scheduled major turnarounds for its O&D plants in the next quarter, which should lift its utilisation rate. Management expects a pickup in O&D activity in 2HFY14, supported by an expected increase in ethylene prices as several major producers, particularly from Japan and South Korea, will be undergoing scheduled major plant turnarounds, which may lead to a supply shortfall. Meanwhile, its F&M plants operated at an 85% utilisation rate in 2QFY14, as the supply disruption at Petronas Chemical (PC) Methanol Plant 2 that had plagued the group for the past three quarters has been resolved.   

Maintain SELL with MYR6.11 FV. We maintain our FY14/15F numbers at this juncture, as we expect 2H14 to make up for the less-than-stellar showing of the first two quarters of the year. On a more positive note, management declared a DPS of 8.0 sen for 1HFY14. We expect management to declare a full-year DPS of 23 sen assuming a 50% payout ratio. Our unchanged MYR6.11 FV is pegged to a 13x FY15F P/E, which is -1SD below the 3-year average. As we believe the counter has fully reflected its earnings potential at this point, we are maintaining our SELL recommendation.

Key highlights

♦  In 2QFY14, Petronas Chemicals conducted major turnaround activities at its: i) ethane cracker plant, ii) polyethylene plant, and iii) methyl tert-butyl ether (MTBE) plant.  

♦  Low sales of high-margin ethane products affected its earnings.  

♦  Another major turnaround for its methanol plant in Labuan is expected to start in mid-August, continuing into mid-September. 

♦  Gas supply at Methanol Plant 2 was slightly affected due to a power failure on FPSO Kikeh in mid-July. Management expects this to be rectified by mid-August.

♦  Management expects ASP for  ethylene to trend up in 2H14 as several major producers will be undergoing scheduled major turnarounds. ASP for polymer is expected to trend sideways as demand is anticipated to decrease in 2H, while ASP for mono-ethylene-glycol (MEG) is expected to stabilise. It expects ASP for aromatics to be lower as several plants are starting production again. 

♦  Management is bearish on urea ASP due to China’s low tax window. It expects the price to recover near year-end as the planting season in the northern hemisphere picks up pace. It expects ASPs for ammonia and methanol to trade sideways. 

♦  The construction of Sabah Ammonia and Urea (SAMUR) plant is in full swing, with the commissioning of its first product expected in 1QFY16. The Sabah government has expressed interest in taking up a stake in the project.  

♦  Management will announce the final investment decision on Petronas Refinery and Petrochemical Integrated Development (RAPID) early next year. 

♦  The company completed the divestment of its Vietnam polyvinyl chloride (PVC) plant – Phu My Plastics and Chemicals Company – to Asahi Glass and Mitsubishi Corporation. 

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Petronas Chemicals Group is a leading integrated petrochemical producer in the South-East Asian region

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Source: RHB