Investment Highlights

• We maintain BUY on Petronas Chemicals Group (PChem) with a lower fair value of RM9.94/share (from RM10.13/share previously), pegged to an FY23F EV/EBITDA of 8x (at parity to its 2-year EV/EBITDA average) and a premium of 3% for our unchanged 4-star ESG rating.

• Pending an analyst briefing later today, we fine-tuned PChem’s FY22F/FY23F earnings by -3%/-2% to account for lower product prices in tandem with our expectations of a weaker petrochemical price outlook in the coming quarters.

• PChem’s 9MFY22 core net profit (CNP) of RM5.6bil was largely within expectations, accounting for 73%-74% of our FY22F earnings and street estimates. As a comparison, 9M accounted for 62%-73% of FY20–21 CNP. The group did not declare any dividends, compared to a 10 sen special dividend back in 3QFY21.

• YoY, 9MFY22 revenue rose by 26% to RM20.2bil mainly due to higher product prices amid elevated oil prices as well as a stronger US dollar. This is despite the decline in production and sales volume as a result of lower plant utilisation rate of 85% (vs. 94% in 9MFY21) from heavier plant statutory turnaround and maintenance activities.

• Subsequently, 9MFY22 CNP also grew by 10% YoY on the back of higher revenue and net interest income. Nevertheless, it was slightly dragged down by lower profit margins and a lower share of results of joint ventures and associates.

• On a QoQ basis, PChem’s 3QFY22 revenue increased moderately by 7% RM7bil, attributable to improved sales volume that was partially mitigated by lower product prices. Note that the higher sales volume stemmed from a higher plant utilisation rate of 97% compared to 72% in 2QFY22 amid reduced statutory plant turnaround and maintenance activities. However, the group’s 3QFY22 CNP decreased by 16% QoQ to RM1.6bil due to lower profit margins and JV contributions coupled with higher tax expenses.

• In 3Q2022, prices for all petrochemical products weakened significantly, with the majority of them declining by 11-21% QoQ. Notably, prices for methanol and paraxylene decreased by a smaller 4-5%. Brent oil price, on the other hand, dropped by 12% QoQ amid a weaker global demand outlook.

• Despite a subdued price outlook within the petrochemical sector on weaker oil price trends, we take comfort from incremental FY23F contributions from Perstorp Holding AB, which was recently acquired and could provide partial relief to the normalisation of product prices.

• Meanwhile, the gradual start-up of Pengerang Integrated Complex could further propel the group’s longerterm earnings growth, albeit with a potentially slower pace in ramping up plant utilisation rates in the near term due to the recent fire accident.

• Given the improving earnings prospects of the group’s PIC operation in tandem with still elevated petrochemical price prospects, PChem currently trades at an attractive FY23F EV/EBITDA of 7.5x, below its 2- year average of 8x and offers compelling dividend yields of 5%.

Source: AmInvest Research - 25 Nov 2022