KUALA LUMPUR (Feb 23): Petronas Chemicals Group Bhd shares rose 2.97% or 16 sen to RM5.55 after research firm RHB Research Institute Sdn Bhd upgraded the stock to “Buy” from “Neutral”.

As at 11.17am, a total of 711,900 shares had changed hands.

In a note today, RHB Research Institute Sdn Bhd analyst Kong Ho Meng noted that Petronas Chemicals (fundamental: 2.7; valuation: 1.2) posted a financial year 2014 (FY14) earnings of RM2.8 billion, in line with the research house’s estimates.

Kong said FY14 was challenging for Petronas Chemicals, as production was affected by major maintenance and turnaround up until the third quarter (3Q), while the last quarter saw product prices dipped an average 33.8%, in tandem with falling oil prices.  

Major maintenance and statutory turnarounds, coupled with falling petrochemical product prices dragged revenue down by 4% year-on-year, he said.

Kong noted that 72% of revenue was derived from the olefins and derivatives (O&D) segment while the remaining 28% came from the fertilisers and methanol (F&M) segment.

Core profit was lower y-o-y by 13.5% as higher margin product capacities were affected by the turnaround with O&D contributing some 67% of core profit and F&M the balance.

Full-year plant utilisation was 80%.

Kong said full-year dividend per share (DPS) for Petronas Chemicals at 16 sen was in line with the research firm’s estimates.

The research firm expects product prices to recover in financial year 2015 (FY15), underpinned by a forecasted upward trend in crude oil prices.

“We are bullish on petrochemicals and are expecting prices to close the year higher by 16%, compared with end of FY14,” Kong said.

“The higher prices could be driven by higher crude oil prices (petrochemical product prices have a positive correlation of 0.88 to crude oil prices) as well as recovering global demand for petrochemicals.

“As there are no more turnarounds for FY15, we are forecasting a full-year average plant utilisation of 87.5%,” he added.

Kong expects fertiliser prices to remain steady due to an expected tight supply, coupled with increasing demand from China and India.

“A point to note, India is facing a shortage of 8m tonnes of urea as the government is no longer providing subsidies to naphtha- based urea producers,” he added.

The research firm upgraded its call on Petronas Chemicals to “Buy” from “Neutral” with a higher target price of RM6.22 from RM6.08, based on a FY15 forecast of 14.6 times price to earnings ratio (PER), in line with regional petrochemical producers.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)