Earnings of MYR2.1bn exceeded our/consensus estimates at 88%/85%.Maintain BUY on a higher MYR7.56 TP (from MYR7.14, 16% upside) based on an unchanged 17.1x FY16F P/E. This is a 10% premium over peers, given its strong EBITDA margins and venture into the lucrative specialty chemicals segment. We upgrade FY15F/FY16F earnings by 22%/6% as we revise our utilisation rate and feedstock cost assumptions.

Core earnings of MYR2,107m. Petronas Chemicals’ 9M15 revenue came in 6% lower YoY due to lower product prices, which was offset by a favourable MYR/USD rate as well as higher sales volume. 9M15 core earnings of MYR2,107m was 7.7% higher YoY on the higher exchange rate, utilisation rate and sales volume, which resulted in a 5.4ppts QoQimprovement in EBITDA margins for 3Q15. We also note that the company did a major statutory turnaround for its Labuan Methanol plantduring the same quarter.

Exciting times. Petronas Chemicals also announced its participation in the Refinery and Petrochemicals Integrated Development (RAPID)project. It expects to have three plants to produce polymers, glycols and elastomers, which are slated to be operational in 2019. The total investment cost is expected to be USD3.9bn (MYR17b n) for an additional capacity of 2.7m tonnes pa (mtpa). The startup of the Sabah Ammonia Urea (SAMUR) project is slated for the end of 1Q16, which would add 1.2mtpa of urea and 0.7mtpa of ammonia to its productsportfolio. We understand that there ought to be no major turnaround in 4Q15, which would help Petronas Chemicals to maintain its strong utilisation rate.

Maintain BUY with TP of MYR7.56. With the strong set of results, we upgrade our FY15F/FY16F earnings by 22%/6% respectively. We revise our FY15F utilisation rate to 85% from 82% and update our assumptions on methane feedstock costs for FY15 and FY16. We maintain our BUY call on the counter with a higher MYR7.56 TP, based on 17.1x FY16FP/E, ie a 10% premium over its global peers. We believe the premium is well deserved due to its strong EBITDA margins as well as Petronas Chemicals’ foray into the specialty chemicals segment.

Strong EBITDA margins. Petronas Chemicals EBITDA margins for 3Q15 stood at 41.2%, helped along by the stronger USD as well as higher utilisation rate during the quarter under review. Historically, the company has maintained an EBITDA margin of around 30%, which is on par with several Saudi Arabian petrochemicals producers. The main reason for the strong cash generating ability is due to its long term feedstock agreement with parent company Petronas. We understand that the ethane cost to Petronas Chemicals is at a slight discount to Saudi Arabian producers. Recall that 80% of its revenue is in USD while only 60% of its costs are USD-denominated. Utilisation rate. During the quarter, Petronas Chemicals recorded an overall plant 99% due to improved plant reliability and higher ethane supply. For fertilisers and methanol, plant utilisation came in at 79%. This low utilisation is to be expected as Petronas Chemicals underwent a statutory turnaround at its Labuan methanol plant. Variables to look out for. Petronas Chemicals’ earnings hinge on several factors, namely: i) plant utilisation rate, ii) MYR/USD exchange rate, and iii) product prices. We understand that in 4Q15 there would be no major turnaround. Hence, the company should do better than its overall plant utilisation of 88%. This is assumingthat the MYR/USD exchange rate and product prices are stable.

Petrochemicals for RAPID. Petronas Chemicals also announced their participation in the petrochemicals portion for RAPID with a total plant capacity of 2.7mtpa for polymers, glycols and elastomers. The total investment cost of these three plants is expected to be USD3.9bn (MYR17bn). The company has also not ruled out the possibility of paring down its stake in the three petrochemicals plant to another partner. We would like to highlight that there could be more petrochemicals participation from Petronas Chemicals, as we had anticipated a total capacity of 7.7mtpa. The company has also mentioned that it is comfortable to raise its debt to a maximum of 2x net debt to EBITDA level. This would mean a debt ceiling of MYR24bn using FY16F numbers. To put this into perspective, MYR24bn in total borrowings would raise Petronas Chemicals’ net gearing to 0.5x from a net cash position. However we doubt that the company would need to raise the amount on its own as we understand that its RAPID participation would be on a joint-venture (JV)basis.