This article first appeared in The Edge Financial Daily on November 13, 2017

Petronas Chemicals Group Bhd
(Nov 10, RM7.44)
Maintain buy with a higher target price of RM8.25: Petronas Chemicals Group Bhd’s (PetChem) third quarter ended Sept 30, 2017 (3QFY17) net profit came in at RM913 million, bringing nine months (9M) of FY17’s to RM3.17 billion (+63% year-on-year [y-o-y]), which was above our and consensus expectations, and constitutes 88% and 86% of our and street forecasts respectively.

While overall plant utilisation for 9MFY17 was lower at 91%, favourable petrochemical prices and a stronger US dollar, which strengthened by 6% y-o-y, helped boost revenue by 28%.

PetChem’s 3QFY17 revenue rose 13% y-o-y to RM4.01 billion on higher sales volume contributed by the Sabah Ammonia Urea, more favourable product average selling prices (ASPs) and bolstered by a 6% strengthening in the US dollar.

Combined, these factors negated the negative impact from lower plant utilisation (86% in 3QFY17 versus 3QFY16’s 100%) due to a statutory turnaround.

The better y-o-y 3Q revenue did not trickle down to net profit, which unfortunately only saw a 3% improvement y-o-y to RM913 million.

This was due to higher costs incurred for turnaround activities during the quarter. The 3QFY17 earnings before interest, taxes, depreciation and amortisation (Ebitda) margin was 6.5 percentage points (ppts) lower at 36.9%.

Despite lower plant utilisation recorded at both its olefins and derivatives, and fertiliser and methanol (F&M) segments, the marginally higher 3Q overall profit was mainly supported by a better F&M segment, which saw revenue rise by 39% y-o-y, as well as a 4ppts improvement in margins, which saw Ebitda surge by 52%.

Methanol prices, which track global prices, showed improvement during the quarter vis-à-vis ammonia prices, which continued to weaken due to a continuous oversupply situation.

Cash balance was reduced by RM1 billion quarter-on-quarter due to ongoing spending on the refinery and petrochemical integrated development project, and incurred plant turnaround costs (about RM100 million). The current 4QFY17 will see the Labuan methanol plant undergo its turnaround.

We raise our FY17 earnings forecast by 14% to reflect improved petrochemical prices, given the tighter supply in the market and the global oil price recovery of late.

We also tweak our FY18 to FY19 earnings forecasts slightly by +3% and +1% for the same reason. However, FY18 earnings growth is expected to be stagnant, mainly due to our house view on the strengthening of the ringgit and as PetChem undergoes another year of heavy turnaround activity.

Downside risks include declines in product ASPs, lower plant utilisation and weaker product demand. — Affin Hwang Investment Bank Bhd, Nov 10