This article first appeared in The Edge Financial Daily on February 22, 2018

Petronas Chemicals Group Bhd
(Feb 21, RM8.14)
Downgrade to market perform with a target price (TP) of RM8.40: Petronas Chemicals Group Bhd (PetChem) posted an impressive set of financial year 2017 (FY17) results, which were not unexpected given the recovery in crude oil prices in the past year as well as the new Sabah Ammonia Urea (Samur) project which started last May. Meanwhile, although the near-term average selling price (ASP) remains upbeat, any uptick in crude oil prices remains challenging for 2018. Thus, with the share price already rallied 10% in the past three month, we believe all positives have been priced in, hence we cut the stock to “market perform” with a higher target price of RM8.40.

PetChem reported a RM1 billion revenue for the fourth quarter of FY17 (4QFY17), which was within our estimate but beating the consensus slightly, totalling RM4.18 billion for FY17, which came 5% to 6% above our house/the street’s estimates. It declared a second interim net dividend per share (NDPS) of 15 sen (ex-date: March 5; payment date: March 21), which was also higher than the 12 sen paid for 4QFY16. This brings its FY17 NDPS to 27 sen, higher than our estimates of 24.8 sen and 19 sen paid for FY16.

A higher plant utilisation (PU) of 93% was achieved from 83% previously, which led to a higher sales volume by 7% quarter-on-quarter, which boosted 4QFY17 net profit to a new record high of RM1.01 billion, which was 10% higher than RM913 million for 3QFY17. Besides the higher sales volume, a stronger ASP also helped drive earnings higher despite a weaker US dollar against the ringgit. Meanwhile, the effective tax rate remained low at 21% from 14% previously due to the global incentive for trading (GIFT) for ethylene sold through Labuan. The higher tax rate in 4QFY17 against 3QFY17 was due to the recognition of deferred tax liabilities at Samur. Segment-wise, olefins and derivatives (O&D) posted a PU which rebounded to 98% from 86% as there were statutory turnaround activities at its derivatives plant in 3QFY17, while the PU of its fertilisers and methanol (F&M) segment improved slightly to 90% from 88% previously.

Despite a lower PU on statutory turnaround activities in FY17, new capacity from Samur, which started in May 2017, coupled with a higher ASP on the recovery in crude oil prices, PetChem reported improved results which saw 4QFY17 earnings inching up 2% to RM1.01 billion from RM987 million in 4QFY16, while FY17’s surged 32% to a record high of RM4.18 billion from RM3.17 billion. With the group’s PU at 91% in FY17 from 96%, its earnings before interest, taxes, depreciation and amortisation margin managed to maintain at 38%, which was fairly impressive, partly due to operational efficiency. Overall, the PU of O&D fell to 94% in FY17 from 100% due to statutory turnaround activities, while F&M’s PU declined to 90% from 93% in FY16, due to higher statutory turnaround activities.

As statutory turnaround activities are expected to be similar as in FY17, the PU in FY18 is seen sustaining at the 90% level. Meanwhile, O&D prices are expected to remain on an uptrend on limited supply due to regional turnarounds. For F&M, fertiliser prices are expected to be firmer on limited supply in the Middle East, while methanol prices are set to strengthen on healthy downstream demand and tight supply in China. Post-4QFY17, we raise our FY18 earnings estimate by 4% solely on a lower tax rate of 16% from 20%, where management has guided for between 13% and 16%, as it will continue to benefit from GIFT. We also introduce our FY19 forecasts, where we expect earnings to grow marginally by 0.2% on higher depreciation charges for refinery and petrochemical integrated development projects.

We cut our rating to “market perform” as its share price has already rallied ahead of valuations on the back of seasonally strong petrochemical prices in 4QFY17. With an unchanged calendar year 2018 price-earnings ratio of 16 times, based on a three-year moving average, its TP is raised to RM8.40 from RM8.10 previously. Risks to our downgraded call include a sudden surge in crude oil prices. — Kenanga Research, Feb 21