This article first appeared in The Edge Financial Daily on August 17, 2018
Petronas Chemicals Group Bhd
(Aug 16, RM9.24)
Maintain buy with a higher target price (TP) of RM11.23: Petronas Chemicals Group Bhd (PetChem) booked RM2.6 billion in first half of financial year 2018 (1HFY18) core profit (+14% year-on-year [y-o-y]). The stronger profit was primarily on higher plant utilisation at the fertiliser and methanol (F&M) wing and stronger product prices. The olefins and derivatives (O&D) division is likely to remain stable in 2018, with strong oil prices providing support for product prices while methanol prices are likely to firm on a potential supply shortage. PetChem is our big-cap top pick in the oil and gas sector.
PetChem booked a core net profit of RM1.4 billion in the second quarter of FY18 (2QFY18), bringing 1HFY18 core earnings to RM2.6 billion — well within our expectations at 54.6% but slightly above consensus 62.5%. A 14 sen per share interim dividend was declared, accounting for 53% of our full-year dividend per share forecast. 2QFY18 core profit surged 41% y-o-y. This was mainly underpinned by stronger margins at the F&M division — on firmer product prices and higher plant utilisation as a result of lower maintenance activities at its ammonia and urea plants — and stronger O&D contributions. This was largely on stronger petrochemical product prices. Cumulatively, 1HFY18 core profits were 14% y-o-y stronger due to improvements at the F&M wing, thanks to contributions from the Sabah Ammonia Urea plant and higher plant utilisation.
Overall market for the O&D business should be more balanced moving forward versus a tighter market before. This is as major petrochemical producers have started up post the end of the plant turnaround season. Strong oil prices should continue to provide solid support for most of the product prices, enabling PetChem to continue enjoying expanded product margins on its fixed gas feedstock cost advantage.
Fertiliser prices are likely to stay firm in the remaining quarters of 2018, in view of tight supply due to the turnaround in the Middle East. Methanol prices are likely to be stronger in 2HFY18, primarily on short supply due to methanol plant turnarounds in China and Southeast Asia. In addition, US sanctions on Iran could also undermine exports of PetChem methanol output to China’s methanol-to-olefin plants if Europe joins in the sanctions — this indicates bullishness on product prices.
While our earnings forecasts are maintained, the TP is upgraded slightly to RM11.23 from RM11.18, 23% upside, as we roll over our valuation to 21 times FY19 forecast (FY19F) price-earnings. This is slightly above two standard deviation of its mean due to the defensive earnings profile. Valuation is justified, given earnings are likely to see a lift in FY20 on a new Refinery and Petrochemical Integrated Development petrochemical plant and its earnings before interest, taxes, depreciation and amortisation margin being two times its locally listed peer Lotte Chemical Titan. Risks to our call are a plunge in oil prices and the lifting of US sanctions on Iran, which may result in a potential methanol oversupply scenario. — RHB Research Institute, Aug 16