Petronas Chemicals’ 1H15 core profit of MYR1.2bn disappointed at only 30%/43% of our/consensus estimates, mainly a result of surprise shutdowns of its Gurun fertiliser and Kertih glycol plants. Maintain BUY as we roll forward to FY16 with a revised TP of MYR7.14 (14% upside),based on 17.1x P/E. We trim our FY15F/FY16F earnings by 22%/15%.

Core profit of MYR1.2bn. Petronas Chemicals’ 1H15 revenue fell 9.8% YoY to MYR6.5bn, due to lower group plant utilisation (PU) rate given a statutory turnaround at its Gurun fertiliser plant and a catalyst change at its glycol plant. For 2Q15, group PU declined to 78% (from 90% in 1Q15), with 84% for olefins and derivatives (O&D) and 73% for fertilisers and methanol (F&M). On a segmental profit basis, O&D’s net profit grew11.3% QoQ and 17% YoY to MYR405m, driven by higher petrochemical prices and a better utilisation rate. Meanwhile, F&M’s net profit dropped23% QoQ and 14% YoY to MYR222m, attributed to the Gurun plant turnaround.

SAMUR and specialty chemicals to start in 2016. The USD1.9bn Sabah Ammonia and Urea (SAMUR) project is on track to be operational at end-1Q16, while its first specialty chemical plant, the aroma chemicals of citral and citronellol, is due to start operation in 2Q16. On its plant utilisation rate, management guided that it is still aiming for an average of 85% group PU going forward. We understand that its methanol Labuan plant will be shut down in 3Q to connect the Dalak pipeline as well as for scheduled maintenance.

Maintain BUY with a revised TP of MYR7.14 (from MYR7.49). In view of its disappointing 1H15 results weighed by a low PU in 2Q, as well as the upcoming methanol Labuan shutdown and the decommissioning of its polypropylene plant, we cut our FY15 and FY16 earnings forecasts by 22% and 15% respectively. We are still positive on Petronas Chemicals as we believe its SAMUR and specialty chemicals plants should provide growth in 2016. Maintain BUY as we roll forward our valuation to FY16 with a revised TP of MYR7.14 (14% upside), based on 17.1x FY16F P/E.

Unexpected turnarounds. We are surprised by Petronas Chemicals’ low PU in 2Q15 as it shut down its Gurun fertilis er and Kertih glycol plants. While the Gurun plant shutdown was for regular maintenance, the Kertih glycol shutdown was due to a change in catalyst. We understand that there will be another turnaround in 3Q – ie the Labuan methanol plant will be closed for maintenance and to allow the commissioning of the Dalak pipeline. Recall that the Dalak pipeline is to solve the methane supply bottleneck that has plagued Petronas Chemicals’ Labuanmethanol plant. Without these turnarounds, O&D would have registered a PU of 93% and F&M at 85%. We evise our group PU rate to 82% from 87.5% for FY15 and 86.4% for FY16 from 87.5%.

Segmental basis. We had expected Petronas Chemicals’ to register better earnings QoQ as we noted an increase in prices of petrochemical products in 2Q15. Although O&D did record a better QoQ performance, on an overall basis, this was not enough to lift Petronas Chemicals’ earnings, which were dragged down by a lower PU rate following the turnarounds that took place in 2Q15.

Petrochemical price outlook. Management guided that it expects to see some downward pressure on O&D products on the back of weaker crude oil prices in 3Q. For F&M, methanol prices are expected to be stable due to a balanced market, while ammonia could see an uptick in prices due to increased demand from India. Urea prices are also expected to stabilise with the oversupply from China likely to be negated by the supply shortage from Middle Eastern producers.