O&D product prices were on an upward trend for 1Q16. However, the same could not be said for F&M product prices, which were mostly lower. Following our product prices update, we revise down our earnings by 13% and 11% for FY16F and FY17F respectively. We maintain our NEUTRAL recommendation, as we reduce our TP to MYR6.18 (from MYR7.19, 8% downside), based on 17.1x FY16F P/E, a 10% premium over peers due to its strong EBITDA margin.

Product prices held up well. Olefins and derivatives (O&D) product prices moved up from their end-FY15 lows with spot prices of some products higher than their average YTD prices (Figure 1). The upward movement in prices was caused by a tighter supply around the region with plants shutting down in Middle East and China. This happened while there was stronger-than-expected demand coming from India and South-East Asia. However, Petronas Chemicals’ fertilisers and methanol (F&M) division did not perform as well as its O&D counterpart. We believe this could be due to the low planting season in 1Q exacerbated by the hot weather around the region.

Three shutdowns. Petronas Chemicals is expected to perform three scheduled turnarounds in FY16, two in 1H16 and one in 2H16. The aromatics and methyl tertiary butyl ether (MTBE) plants are expected to shut down in the first half while the ASEAN Bintulu fertiliser plant is likely to shut down in the second half of the year. Despite these shutdowns, Petronas Chemicals is still confident of maintaining a group plant utilisation rate of 85%-90%.

1Q16 expectations. We expect 1Q16 earnings numbers to be below 25% of our full year forecasts. We have included the start-up of its Sabah ammonia and urea (SAMUR) plant into our forecast, which would only commence operations in 2H16. Another point we would like to highlight is that product prices in 1Q were lower than FY15’s average, leading us to expect 1Q numbers to be slightly softer, as shown in Figure 2. Downgrade TP to MYR6.18, maintain NEU

TRAL. Following the 1Q16 product prices update, we have adjusted our assumptions for the full year and downgrade earnings by 13% and 11% for FY16F and FY17F. We have also adjusted our currency assumption to MYR4.01 for FY16F following our house revision on MYR/USD. We value Petronas Chemicals at 17.1x FY16F P/E, a 10% premium over its global peers due to its strong EBITDA margins of +30%. We therefore arrive at our TP of MYR6.18. We offer an alternative DCF valuation as shown in Figure 3, implying a MYR6.46 TP. A continued upward movement in product prices would be a catalyst for us to upgrade our earnings and recommendation. Risks to our forecast include unexpected shutdowns resulting in lower plant utilisation as well as a downward movement of product prices.

Holding up. Petrochemicals product prices held up well in 1Q16. As shown in Figure 1, O&D product prices are moved up from their end-FY15 lows with spot prices of some products higher than their average YTD prices. The upward movement in prices was caused by a tighter supply around the region with plants shutting down in Middle East and China. This happened while there was stronger-than-expected demand coming from India and Southeast Asia. However, Petronas Chemicals’ F&M division did not perform as well as its counterpart (O&D). We believe this could be due to the low planting season in 1Q exacerbated by the hot weather around the region.

Three shutdowns. Petronas Chemicals is expected to perform three scheduled turnarounds in FY16, two in 1H16 and one in 2H16. The aromatics and methyl tertiary butyl ether (MTBE) plants are expected to shut down in the first half while the ASEAN Bintulu fertiliser plant is likely to shut down in the second half of the year. Despite these shutdowns, Petronas Chemicals is still confident of maintaining a group plant utilisation rate of 85%-90%.

Elastomer project cancelled. Petronas Chemicals announced that it would no longer proceed with the elastomer project in RAPID. It cited the product’s weak market outlook and expectations of a low project return on investment as the main reasons. The cancellation would reduce RAPID’s petrochemical capacity to 3.15m tonnes pa (mtpa) from 3.5 mtpa. This would also reduce the total investment to USD2.6bn from USD3.9bn. Our earnings and TP are unaffected by the cancellation, as RAPID is only expected to come online in FY19.

1Q16 expectations. We expect 1Q16 earnings numbers to be below 25% of our full year forecasts. We have included the start-up of its SAMUR plant into our forecast, which would only commence operations in 2H16. Another point we would like to highlight is that product prices in 1Q were lower than FY15’s average, leading us to expect 1Q numbers to be slightly softer, as shown in Figure 2.

Downgrade TP to MYR6.18, maintain NEUTRAL. Following the 1Q16 product prices update, we have adjusted our assumptions for the full year and downgrade earnings by 13% and 11% for FY16F and FY17F. We have also adjusted our currency assumption to MYR4.01 for FY16F following our house revision on MYR/USD. We value Petronas Chemicals at 17.1x FY16F P/E, a 10% premium over its global peers due to its strong EBITDA margins of +30%. We therefore arrive at our TP of MYR6.18. We offer an alternative DCF valuation as shown in Figure 3, implying a MYR6.46 TP. A continued upward movement in product prices would be a catalyst for us to upgrade our earnings and recommendation. Risks to our forecast include unexpected shutdowns resulting in lower plant utilisation as well as a downward movement of product prices.

Source: RHB Research - 27 Apr 2016