Petronas Chemicals posted FY14 core earnings of MYR2.8bn, coming in at  our  and  consensus  estimates of  102%/100%, which we deem  in line. We believe the worst is over, and  hence upgrade  our  rating  to  a BUY with a higher TP of MYR6.22 (15% upside),  based on a FY15F 14.6x P/E.We adjust our petrochemical product prices assumptions, resulting in a marginal uptick to FY15/FY16 earnings.

FY14  earnings  reach  MYR2.8bn.  Major  maintenance  and  statutory turnarounds,  coupled with falling petrochemical product prices,  dragged revenue down by 4% YoY;  72% of revenue came in from the olefins and derivatives  (O&D)  segment  while  the  rest  is  made  up  of  the  fertilisers and  methanol  (F&M)  segment.  Core  profit  is  lower  YoY  by  13.5%  as higher margin product capacities were affected by the turnaround  where 67% is made up of O&D,  while F&M made up 33% of core profit. Fullyear plant utilisation came in at 80%. If unaffected by turnarounds,  the number  would  be  much  higher  at  87%.  Full-year  DPS  for  Petronas Chemicals came in at 16 sen, in line with our estimates.

Outlook.  FY14  had  been  a  rough  ride  for  Petronas  Chemicals. Production was affected by major maintenance and turnaround up until 3Q,  while  the  last  quarter  of  the  year  saw  product  prices  tumble  in tandem with the fall in crude oil prices. On average, product prices fell by 33.8%.  We  are  bullish  on  petrochemicals  and  are  expecting  prices  to close the year higher by 16%, compared with  end of  FY14. The higher prices  could  be driven by higher  crude oil prices  (petrochemical product prices have a positive correlation of 0.88  to  crude oil prices) as well as recovering  global  demand  for  petrochemicals.  As  there  are  no  more turnarounds  for  FY15,  we  are  forecasting  a  full-year  average  plant utilisation of 87.5%.

Upgrade to BUY with  a  higher TP of MYR6.22.  We expect FY15 to be a better year as there are no more major turnarounds. We  also  expect petrochemical prices to regain the ground lost in the last quarter of FY14. All in,  we  upgrade  our recommendation to a BUY (from Neutral) with a higher TP of MYR6.22 (from MYR6.08) based on a  FY15F 14.6x P/E, in line with regional petrochemical producers. 

Petrochemical  prices  rout.  Petrochemical  product  prices  fell  in  tandem  with  the weakness in crude oil prices, brought upon by new supplies coming online as well as pressure from cheaper feedstock costs as Brent crude prices  fell 60% from  the  2014 high of USD114.80/barrel (bbl). Propylene and methy tert-butyl ether (MTBE) was the worst hit, falling by 129% and 120% from the start of FY14. O&D prices fell 42.2% on average. F&M product prices were relatively spared as  they  only fell  17.2%, mostly due to tight supply of fertilisers from North Africa, Middle East and Eastern Europe,with ammonia appreciating by 13.6% when other petrochemical prices plunged.

Set to recover. We envision product prices to recover in FY15 as we are forecasting crude  oil  prices  to  be  on  an  upward  trend.  Petrochemical  product  prices  have  a positive correlation of 0.88 to crude oil prices. Fertiliser prices are expected to remain steady  as  we  expect  there  to  still  be  a  tight  supply,  coupled  with  an  increasing demand  from  China  and  India.  A  point  to  note,  India  is  facing  a  shortage  of  8m tonnes of urea as the Government is no longer providing subsidies to naphta- based urea  producers.  Petronas  Chemicals  is  also a  beneficiary  of  the stronger  dollar  as products are sold in the USD, while only 80% of its costs are quoted in the USD.

Risk.  Another  crash  in  oil  prices  would  affect  Petronas  Chemicals’  earnings  as product prices have  a positive correlation to  the  crude oil price movement.  However, we believe the worst  is over and crude oil prices  should slowly inch up and average to USD72.50/bbl in 2015. We provide a sensitivity  analysis table  (Figure 2)  to reflect Petronas  Chemicals’  potential  earnings  in  the  event  that  crude  oil  prices  average USD72.50/bbl (base case), USD100/bbl (bull case) and USD40/bbl (bear case). 

Source: RHB