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

Petronas Chemicals Group Bhd
(May 22, RM8.43)
Maintain hold with a higher fair value (FV) of RM9.60:
We maintain our “hold” recommendation on Petronas Chemicals Group Bhd (PChem) but with a higher FV of RM9.60 per share (from an earlier RM8.35 per share) by raising financial year 2019 forecast (FY19F) earnings before interest, taxes, depreciation and amortisation (Ebitda)) from eight times to 9.3 times, based on two standard deviations above its three-year average of eight times given the stock’s positive correlation to crude oil price, which has risen above US$75 (RM297.75) per barrel. We note that the share price has already outperformed the FBM KLCI by nine percentage points (ppts) due to the upturn in crude oil prices over the past six months.

Our PChem’s FY18F to FY20F earnings are maintained as the group’s first quarter (1QFY18) core net profit of RM1.21 billion generally came in within expectations, accounting for 28% of our FY18F earnings and 30% of consensus, versus 19% to 31% for 1QFY15 to 1QFY17 against their respective years. We highlight that our FY18F to FY20F earnings are 8% to 9% above consensus. The group did not declare a first interim dividend as expected.

As we had highlighted in our 4QFY17 results update, the group’s first half (1HFY18) results are likely to be strong with high plant utilisation rates with only one minor plant maintenance in 2QFY18. However, 2HFY18 earnings could soften as four plants, which include the ethylene cracker, methanol and Asean Bintulu Fertiliser plants, will undergo turnaround activities that could lower the 1QFY18 utilisation rate of 100% to an overall FY18F rate similar to 91% in FY17.

Excluding an exceptional loss of RM153 million (forex movement on shareholder loans) from the RM3.8 billion disposal of a 50% equity stake in PRPC Polymers S/B to Saudi Aramco, PChem’s 1QFY18 core net profit surged 21% quarter-on-quarter as the group’s average plant utilisation climbed to full utilisation at 100% from 93%, together with a 4ppts decrease in effective tax rate to 17%. The results were further improved by higher product prices although partly offset by a stronger ringgit.

On a year-on-year (y-o-y) comparison, 4QFY17 revenue rose 6% due to higher product prices and commencement of Petronas Chemical Fertiliser Sabah S/B (formerly Sabah Ammonia Urea plant) in May 2017 amid a slight 1ppt improvement in plant utilisation. However, 1QFY18 core net profit dipped 6% y-o-y due to RM120 million under-accrual of FY17 manpower expenses amid a stronger ringgit which offset the impact of higher US dollar revenues.

The group’s product prices have a strong correlation to Brent crude oil prices which have risen 14% since March 31, 2018 to US$79 (RM313.63) per barrel. Likewise, naphtha has strengthened by 13%, while urea 6% and polyethylene 5%. However, benzene and polypropylene was flat, while ethylene fell 10% and methanol 2% due to overcapacity.

PChem is currently trading at a fair one-year forward Ebitda of nine times, which translates into a 25% premium to Thailand’s PTT Global Chemicals’ 7.2 times, which nears the three-year premium of 28%. — AmInvestment Bank, May 22

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