Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with unchanged forecasts with a higher fair value of RM11.30/share (from RM11.10/share earlier), pegged to an unchanged FY23F EV/EBITDA of 8x and a premium of 3% for our ESG rating of 4 stars. This is at parity to PChem’s 2-year EV/EBITDA average against the backdrop of elevated oil prices trading at US$100/barrel currently.

• Pending an analyst briefing later today, we have raised PChem’s FY23F earnings by 18% due to higher product price assumptions (+5% for olefin/derivatives and +3% for fertiliser/methanol). Given a milder crude oil price expectation of US$90–100 in 2023 vs. US$100–110/barrel in 2022, we tweak FY23F earnings revision by a slight 3%.

• Our higher earnings projections stem from PChem registering another quarterly record high with a 1QFY22 core net profit of RM2,076mil (+61% YoY) that is above expectations, accounting for 30% of our and consensus’ FY22F earnings. As a comparison, 1Q accounted for 18% of FY21 core net profit. The group did not declare an interim dividend as expected.

• QoQ, the group’s 1QFY22 revenue slid 5% to RM6.6bil as average plant utilisation slid 3% points to 87% largely from statutory turnaround and maintenance activities in the olefin and derivative (O&D) segment during the quarter as opposed to a focus on the fertiliser and methanol (F&M) division’s Bintulu and Labuan plants in 4QFY21.

• Nevertheless, 1QFY22 EBITDA margin rose 5% points QoQ to 37% from higher product prices and lower operating costs, which supported core net profit growth of 6% QoQ. This was partly offset by a 29% QoQ drop in associates/JVs to RM123mil and a 1.7%-point increase in effective tax rate to 6.4%.

• In 1Q2022, crude oil rose 36% QoQ while naphtha & ammonia increased 25%, ethylene 18%, paraxylene 15%, benzene 13%, polyethylene 7% and polypropylene 4% amid supply chain disruptions triggered by the Ukraine-Russia conflict.

• Post-1QFY22, crude oil prices have risen further by 4% while naphtha decreased 3% and polyethylene was flat, tightening its 5-year average discount to naphtha to 20% from 1Q2022 average of 25% (Exhibit 9). Over the same period, ammonia prices climbed 26%, benzene prices 16% and paraxylene 15%, while urea contracted 13%, methanol 6% and ethylene 2%. This supports our sanguine view of PChem’s firm earnings delivery over the next quarters.

• We remain positive on the proposed €1.54bil (RM7bil) acquisition of Sweden-based Perstorp Holding AB, which will be value-accretive and strengthen PChem’s basic petrochemicals portfolio while accelerating its expansion into higher margin derivatives, specialty chemicals and solutions. This involves end markets such as paints and coatings, construction, automotive, personal care and food, feed and nutrition, and access to common end markets which offer significant cross-selling opportunities and growth prospects to the rest of the group’s operations.

• We also remain bullish on PChem’s earnings prospects given the strong correlation to its share price as firmer naphtha costs will support petrochemical product prices. Hence we expect stable near-term earnings as Brent crude oil prices have recently traded at or above the US$100/barrel threshold vs. a 4Q2021 average of US$79/barrel.

• Given the improving earnings prospects of the group’s PIC operation in tandem with improved petrochemical price prospects, PChem currently trades at an attractive FY23F EV/EBITDA of 7x, below its 2-year average of 8x and offers compelling dividend yields of 5%.

Source: AmInvest Research - 27 May 2022