Petronas Chemicals Group Bhd
(Nov 7,RM5.89)
Maintain “outperform” with reduced target price of RM6.68: Although net profit rose 19% qurter-on-quarter (q-o-q), the third quarter of 2014 (3QFY14) results were somewhat disappointing as the year-to-date (YTD) nine months of 2014 (9MFY14) net income of RM1.96 billion still fell short of expectations as it made up only 58%/59% of house/street’s financial year (FY14) full-year estimates.

The main discrepancy was mainly due to the unexpected drop in 3Q14 plant utilisation to 75%, which was caused by methane gas supply limitation, resulting in 9M14’s utilisation rate of 77% compared to our full-year assumption of 79%.

3QFY14 net profit leapt 19% q-o-q to RM661 million from RM555 million while revenue grew 6% over the quarter.

Olefins & Derivatives (O&D) reported a 47% surge in earnings before interest, taxes, depreciation, and amortisation (ebitda) as revenue jumped 22% due to higher average selling price for ethane-based products as well as the absence of turnaround activity for this segment in 3Q14 compared with three turnarounds previously. Fertilisers & methanol (F&M) saw lower ebitda by 45% as revenue fell 26% due to gas supply limitation and one turnaround activity in 3Q14.

Year-on-year, the 3QFY14 net profit grew 4% as revenue inched up 1% from 3Q13. This was due to higher utilisation rate of 75% from 70% as 3Q13 had four turnaround activities.

O&D posted ebitda, which rose 15% on the back of a 3% hike in topline thanks largely to higher average sales price (ASP) and the absence of turnaround activity in 3Q14. Although ASP for fertilisers strengthened, gas supply limitation had pulled F&M’s ebitda lower by 23% as revenue contracted by 12%.

Operationally 4Q14 is a better quarter given that the statutory turnaround activities had already been completed in 3Q14 while there should be no more gas supply constraint in 4Q14. However, prices for O&D are expected to be soft in 4Q14 on weakening oil and naphtha values coupled with bearish demand, while price outlook for F&M is mixed. Generally, management guided a challenging price outlook for 2015 on additional capacity but likely to rebound in 2016 as demand increases.

We trim our FY14)/FY15/FY16 estimates by 14%/7%/3% respectively on the back of: (i) utilisation rate for F&M to 80% from 82.5% in FY14E, (ii) US dollar/ringgit assumption of 3.28/3.20 from 3.19/3.15 for FY15/FY16, and (iii) oil price benchmark of 97/98/96 per US$/barrel from 102/107/103.

Price target is now reduced to RM6.68/share from RM7.19/share previously.  — Kenanga Research, Nov 7

This article first appeared in The Edge Financial Daily, on November 10, 2014.