This article first appeared in The Edge Financial Daily on January 23, 2018

Petronas Chemicals Group Bhd
(Jan 22, RM8)
Downgrade to hold with an unchanged target price (TP) of RM8.50: Petronas Chemicals Group Bhd’s (PetChem) financial year 2017 (FY17) results (tentatively out on Feb 20) could be slightly ahead of our expectations on a stronger-than-expected average selling price (ASP), which is benefiting from the uptrend in crude oil prices. PetChem’s share price has spiked 9% in the past month and is now close to our TP of RM8.50 (9.1 times 2018 enterprise value against earnings before interest, taxes, depreciation and amortisation) (10% premium to industry peers). Due to a limited upside to our TP, the stock is now a “hold”.

We estimate a core profit after tax and minority interest (Patmi) of RM1.15 bilion for the fourth quarter of FY17 (4QFY17) (+11% year-on-year [y-o-y]; +25% quarter-on-quarter [q-o-q]) based on an 8.5% higher y-o-y ASP of RM3,397 per tonne. We forecast its 4QFY17 factory utilisation rate to be lower at 82% (-13 percentage points [ppts] y-o-y; -4ppts q-o-q); this is due to closure of the Labuan methanol plant due to a scheduled turnaround. The cumulative FY17 Patmi of RM4.34 billion represents 103% and 105% of our full FY17 and consensus’ forecasts. 

Year to date, the blended ASP is flattish y-o-y at RM3,384 per tonne, consistent with our FY18 forecast for a flat y-o-y ASP. However, given that crude oil prices have been rising, and given the fact that petrochemical prices tend to track crude oil prices, there is an upside potential to our ASP assumption. A 1% change in naphtha prices versus our base case (on a full-year basis) will move our FY18 earnings forecast by RM50 million, or 1.2%. However, it is still early in 2018 and we will monitor the situation closely. 

PetChem’s valuations are already above the industry peer average, justified by its superior balance sheet and cash flows. For now, the stock is a “hold” and we recommend holding its shares for a respectable 3.3% dividend yield. — Maybank IB Research, Jan 22