This article first appeared in The Edge Financial Daily on April 15, 2019
Petronas Chemicals Group Bhd
(April 12, RM8.84)
Maintain buy with an unchanged fair value (FV) of RM10.40: We maintain our “buy” recommendation on Petronas Chemicals Group Bhd (PetChem) with an unchanged FV of RM10.40 a share based on unchanged financial year 2019 forecast (FY19F) enterprise value (EV)/earnings before interest, taxes, depreciation and amortisation (Ebitda) of 10 times — three standard deviations above its three-year average of eight times given the correlation between the stock and crude oil prices.
Online media reported that an explosion and fire occurred at Petroliam Nasional Bhd’s (Petronas) Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang last Friday. The blast, which appeared to stem from a leaking gas tank, was loud enough to be heard within a 50km radius of the project. So far, two persons have been reported to be injured in the incident.
Recall that the group’s 50%-owned Pengerang petrochemical division has reached mechanical completion of 96% with production expected to commence towards the later parts of the second half of FY19. Back in 2017, PetChem sold a 50% stake in PRPC Polymers to Saudi Aramco for RM3.8 billion.
Given Petronas’ strict adherence to health, safety and environment requirements, we expect an extensive investigation into the causes of this incident, which could delay the commencement of petrochemical production.
Management expects minimal contributions this year, with plant utilisation around 70% for the first three to six months which will progressively be ramped up to 90% over a time frame yet to be confirmed due to the complexity and integration required of Petronas’ refinery.
Likewise, our FY19 forecasts have not incorporated any increase in PetChem’s output given that the group has guided that average plant utilisation could remain flattish above 90%, similar to FY16 to FY18. This is supported by five major turnaround activities this year, which will be spread out over the first quarter of FY19 (1QFY19) to 3QFY19, compared with six in FY18.
However, if the Rapid investigation defers production next year, we expect a six-month delay to cause PetChem’s FY20F earnings to slightly decline by 3%, assuming that product prices are stable. For now, we maintain our forecasts pending further clarity from management.
Even though management’s market guidance for 1QFY19 is bearish, we remain sanguine given the strong correlation between the group’s product prices and Brent crude oil prices which have risen by 37% since Dec 31, 2018 to US$71 (RM291.81) a barrel currently.
This will be a greater impact on the group than temporary delays in Rapid commencement as a 1% increase in average product prices will translate into a higher 3% rise in net profit.
PetChem currently trades at a reasonable FY19F EV/Ebitda of nine times, which translates into a 26% discount (versus its three-year average discount of 17%) to Taiwan-based Formosa Petrochemical’s premium 12 times, while its dividend yield is fair at 4%. — AmInvestment Bank, April 12