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This article first appeared in The Edge Financial Daily on January 23, 2019

Petronas Chemicals Group Bhd
(Jan 22, RM8.52)
Maintain buy with a lower target price (TP) of RM9.20:
The ongoing trade talks between the US and China have weighed on oil market sentiment on fear of weaker global demand, and inevitably hurting petrochemical prices. Our cuts in earnings reflect a weaker price trend in the first quarter of 2019 (1Q19), likely to persist in 2Q19 before recovering in the second half of 2019 (2H19 estimate).  

Prices for polyethylene products have fallen about 15% since 3Q18 on subdued demand and ample supply. Benzene and methanol took the largest hits with price declines of 30% to 40%. In our view, global oil prices should rebound to the US$70 to US$75 per barrel, after a compromise in the ongoing trade talks, driving a recovery in product prices.

We lowered our 2019 to 2020 estimate earnings per share (EPS) by 10% to 11%, factoring in lower average selling prices for selected olefins and derivative products, but maintained our plant utilisation rate at 91% and US$/ringgit assumption. All in, we project Petronas Chemicals Group Bhd (PetChem) to report an EPS fall of 10% in 2019 estimate (we had previously expected a flat growth). The Pengerang petrochemical plants in Johor have started commissioning, targeting to complete by end-2019, with the utilisation rate expected to reach about 75% in financial year 2020 estimate. Our capital expenditure assumptions remain unchanged, factoring in RM3 billion after the Refinery and Petrochemical Integrated Development start-up.

We foresee the upcoming 4Q18 results to be weaker sequentially, albeit still in line with our forecasts on weaker product prices — polyethylene, MEG and benzene prices retraced 10% to 20%, methanol about 15% quarter-on-quarter (q-o-q), while urea held up pretty well, supported by a strengthening in US$/ringgit by 2% q-o-q in PetChem’s favour.

PetChem’s share price has corrected 16% since its high of RM10.20 in November 2018 and in our view, it has largely priced in negative news concerning low product prices in the near term. We revised down our 12-month TP to RM9.20 from RM10.30, after our cuts in earnings but at an unchanged TP-earnings ratio of 17 times. Nevertheless, we still like PetChem’s long-term capacity expansion story when earnings start to contribute in 2020 estimate, which would give a roll forward TP of RM10.50. The stock currently offers a decent dividend yield of 3.5% based on a 50% payout assumption, in line with the historical average. We reaffirm our “buy” call on an expected recovery in average selling prices in 2H19. — Affin Hwang Capital Research, Jan 22

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