Review

• Petronas Chemicals Group (PChem)’s FY16 core profit of RM3.1bn (+13% YoY) exceeded our expectations and consensus estimates by 15% and 14% respectively. The outperformance was mainly due to:- 1) higherthan-expected plant utilization (PU) rates and 2) we had earlier expected startup costs from SAMUR in 4Q16. However, commercial launch of SAMUR is now deferred to 1Q17 instead.

• Headline net profit of RM2.9bn (+5% YoY) includes one-off exceptional items totaling RM177mn, including:- 1) provisions for decommissioning of disposed VCM plant (RM63mn), and 2) write-off for cancellation of RAPID elastomers project (RM244mn).

• Overall, FY16 was a good year for the group on the back of:- 1) increased volumes from higher group PU of 96% (FY15: 85%), 2) strong USD versus MYR, and 3) better petrochemical prices. These factors more than offset weaker product prices for the fertilizer and methanol (F&M) segment and enabled EBITDA margin expansion to 38% (FY15: 34%).

• Record PU rate since listing was driven by:- 1) improved ethane and methane feedstock supply, underpinned by supplier’s plant rejuvenation and the new Dalak pipeline, and 2) lower weighted average plant turnaround activity (TA) days by 46%. In turn, this resulted in higher ethanol (+15% YoY) and methanol (+45% YoY) production.

• The group declared 4Q16 DPS of 12 sen, resulting in higher total FY16 payout of 19 sen (FY15: 18 sen). This exceeded our expectations, and implied stable payout of 52%, similar to FY15.

Key Takeaways From Conference Call

• Renewed guidance on plant utilization PU rates: 1) management targets group PU of 85%-90% in FY17, 2) Kerteh IPC is expected to shut down for circa 50-55 days during its major statutory plant TA exercise, 3) TA for the olefins segment are mainly for downstream plants in 3Q16, 4) upstream ethane crackers will shut down in tandem with maintenance of affected downstream plants, 5) Kerteh’s ethane cracker will run at a reduced rate of 50%-60% during TA for downstream plants, 6) the timing of SAMUR’s 1-year warranty shutdown is currently subject to management’s discretion – but is expected to take place in end-17 for 40- 50 days , and 7) outside of Kerteh IPC, there will also be TA at MTBE plant at Gebeng and methanol plant 1 at Labuan.

• SAMUR’s commercial operation is expected to commence in 1Q17 following mechanical completion in end-16. However, production ramp up will be progressive throughout the year. 2017 PU is expected to be circa 70% after accounting for possible hiccups during the start-up phase. Meanwhile, PChem’s aroma chemicals complex will also commence commercial operations in 2017.

• Capex spend is expected to peak in FY17-18 (FY16: RM3.9bn), where it will likely escalate 25% YoY.

Impact

• We incorporate FY16 unaudited numbers into our forecasts, and introduce FY19 profit estimates. We also tweak our assumptions for FY17- 18 capex and taxes following management’s revised guidance. On top of that, we increase depreciation charges to reflect an expanded asset base. As a result, our FY17-18 forecasts are raised by 0.5%.

Valuation

• We maintain our Hold recommendation for PChem as we believe FY17 earnings will likely be subdued, underpinned by:- 1) prolonged statutory maintenance at main facility, Kerteh IPC, 2) drag from SAMUR during gestation period, and 3) tapering petrochemicals demand, coupled with soft F&M prices.

• Against this backdrop, there is material likelihood that the group may disappoint after a stellar FY16. On top of that, valuations are stretched, whereby the stock is currently trading 1SD above historical P/E average. Following the revision to our forecasts, our TP on PChem is raised to RM8.20 (previous: RM7.90) based on unchanged 11.5x CY17 EV/EBITDA.

Source: TA Research - 21 Feb 2017