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BUY, new MYR12.21 TP from MYR10.86, 20% upside with c.3% FY22F yield. Our TP is pegged to 9x FY23F EV/EBITDA (5-year mean) with a 3% premium, based on its ESG score of 3.1. Similar to the oil price trend, we expect petrochemical prices to remain high – but these should taper off from recent peaks. Petronas Chemicals’ near-term earnings should be solid, and its valuation remains attractive (below 5-year mean) – even with the ASP moderation anticipated, in line with our crude oil forecasts.
Likely to retain shariah-compliant status. Management is positive over its discussion with the Securities Commission over its shariah status in the upcoming review, even though its cash ratio of 33.07% exceeded the shariah-compliant threshold of 33%, as reported in its latest annual report. The threshold was temporarily exceeded slightly, due to the unexpected higher financial performance recorded. The matter has been rectified, and the ratio has since returned to below the threshold level. Further measures have been in place to ensure the threshold is not exceeded again.
ASPs could taper from the peak, but should remain elevated. Management is cautious in its outlook for petrochemical prices, and expects prices to moderate in the next three months. However, overall prices should remain elevated amidst the uncertainties over the Ukraine-Russia war and high gas prices. PCHEM’s overall sales volume was not affected by the recent lockdown in China (accounting for 16% of its FY21 topline), as its products are being channelled to other South-East Asian countries.
Pengerang Integrated Complex (PIC) start-up has been further delayed to 2H22,given the continuous delay in the progress of the refinery and cracker. Management still expects to achieve 50-60% utilisation in first 12 months and break even on EBITDA terms based on current spreads. Overall PIC feedstock is traded at a discount to market prices due to logistics convenience, but profitability will be adjusted in a “balanced way” based on the overall profit of the integrated plants (refineries, crackers and petrochemical) which involves subsidisation by the stronger division.
More final investment decisions (FIDs) on the way. While overall plant utilisation should remain above 90% this year (FY21: 93%), 2H22 utilisation will be higher, as all four planned turnarounds will be done by 1H22. Annual guidance is still at USD2-2.5bn, with an equal split between maintenance capex and growth capex. Following the melamine FID announcement in January, management expects further derivatives FIDs in the near term which fetch higher margins, and continue to grow inorganically via M&As.
We lift FY22-24F earnings by 13-23%, factoring higher ASPs. A 1% swing in ASP may lead to a c.1.2-1.3% change in EBITDA. Downside risks: Weaker-than-expected petrochemical prices and plant utilisation rates.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....