This article first appeared in The Edge Financial Daily on August 13, 2019
Petronas Chemicals Group Bhd
(Aug 9, RM7.39)
Maintain buy with a lower target price (TP) of RM8.77: We are anticipating the upcoming Petronas Chemicals Group Bhd’s (PetChem) second quarter of financial year 2019 (2QFY19) earnings to be better on a quarterly sequential basis. We expect 2QFY19 earnings to come in between RM900 million and RM1.1 billion due to lower turnaround activities during the quarter. Recall that in 2QFY19, PetChem completed the maintenance on Petronas Chemicals Aromatics Sdn Bhd in April over 26 days (in addition to 14 days in 1QFY19). It also shut down its methyl tertiary butyl ether plant in Gebeng, Pahang in mid-April for 22 days. Due to this, we opine that its plant utilisation rate (PUR) for 2QFY19 will remain above 90%.
As previously guided by PetChem management, 3QFY19 will see several heavy turnaround activities (TA) taking place. Four plants are expected to be under TA and this is expected to bring down PetChem’s PUR to below 90%. We opine that its PUR will be similar to that of 3QFY18, at 79%, when heavy TA took place which limited its production volume for some products.
We opine that in the near future the company’s average selling price (ASP) will remain fragile and under pressure from ongoing geopolitical tensions that affect crude oil price movements, which we opine will drive consumers to take a cautious purchasing mode. This is further exacerbated by the recent revision of global economic growth target by International Monetary Fund to 3.1% from 3.3% previously.
That said, we observed that the spreads for some chemicals such as polypropylene, benzene and urea have gradually recovered and stabilised from the recent bottom in March to May 2019. Hence, we opine that the gradual recovery in ASP for chemical products and the expected continued soft movement of the ringgit for the rest of the year will cushion PetChem’s earnings. According to our in-house projection, the ringgit is expected to average 4.15 per US dollar in FY19 whilst our year-end target stands at 4.15 per US dollar.
Furthermore, demand for chemical products is expected to be cushioned by numerous TA activities that will take place globally. According to Bloomberg, it is estimated that 26 oil refineries are scheduled for shutdown throughout the year for expansion and/or maintenance works. This we reckon will balance out the new supply coming into the market from earlier this year.
While we note that the ongoing US-China trade war will, in general, have a negative impact globally, especially on demand in the longer term should the trade war prolong. However, we opine that pockets of opportunities remain amid the trade war for regional chemical producers such as PetChem. In terms of demand, we have observed that Malaysia’s chemical exports to the rest of the world in monetary value remain relatively strong and similar to the levels in 2017 and 2018; in some months, exports were even higher than in 2017, prior to the US-China trade war. This is despite the softer year-on-year growth in chemical exports compared to 2018, signalling demand for chemicals remains largely intact despite the geopolitical tensions. To date, chemicals remain Malaysia’s third-largest exports at 6% of total exports.
Furthermore, we opine that the recently-imposed 10% tariff on Chinese goods could potentially lead to higher product pricing for a broad range of chemical products, as well as opportunities for PetChem to produce new chemical products for the Chinese market due to PetChem’s wide range of petrochemical products.
Due to the heavy turnaround activity in 3QFY19, PetChem’s utilisation rate could potentially drop to its 3QFY18 level, which was at 79%. Coupled with the soft albeit gradually improving product prices, we have trimmed our FY19-20F earnings by -8.0% and -3.3% respectively.
Despite the earnings revision, we opine that all the negatives have been priced in, and there is a potential upside from the various reasons stated above. Our TP is derived from a price-earnings ratio of 16 times pegged to earnings per share of 54.8 sen for 2020.
Despite the heavy TA and lower PUR, albeit over 90%, we reiterate our view that PetChem’s current share price presents a strong buying opportunity given its clear growth strategy, venture into specialty chemicals with the ongoing acquisition of Da Vinci Group BV and stable outlook for its chemical products. — MIDF Research, Aug 9