AmWatch - Petronas Chemicals : Driven by higher plant maintenance and forex gains HOLD

STOCK FOCUS OF THE DAY

Petronas Chemicals : Driven by higher plant maintenance and forex gains             HOLD

We maintain our HOLD rating on Petronas Chemicals Group (PChem) with a higher fair value of RM6.36/share (from RM5.80/share previously), pegged to a rolled forward and unchanged FY16F EV/EBITDA of 8.5x (based on a 50% premium to PTT Global Chemicals). We have raised our FY15F earnings by 12% to incorporate foreign exchange gains on overall product prices. Additionally, we have also raised PChem’s FY16F-FY17F earnings by 10%-20% with the inclusion of the contributions of the SAMUR plant in Sipitang, Sabah, which is on track for full completion in 1HFY16 and will increase the group’s production capacity from 1.4mmtpa to 2.6mmtpa.

PChem’s 9MFY15 net profit came in above expectations largely due to favourable forex gains and improved plant utilisation, accounting for 85% of our earlier FY15F earnings and 81% of consensus’ RM2,557mil. PChem’s 3QFY15F earnings surged by 65% QoQ to RM916mil mainly due to higher sales volume and realised favourable exchange rate movement, which offset the impact of lower average product prices. PChem’s overall plant utilisation rose to 2QFY15 decreased to 88% from 78% in 2QFY15, in which the group had undertaken a statutory turnaround activity at its Gurun urea facility. Management expects FY15F plant utilisation to remain at 85% and rise to 90% in FY16F as the group is expected to undergo normal turnaround activities.

Nevertheless, the near-term outlook for product prices remains mixed as a likely improvement in olefins and derivatives, supported by supply constraints by Middle-Eastern plant maintenance activities towards the end of the year, could be offset by softer fertiliser and methanol prices, and dampened by weak demand and crude oil prices. PChem has reached the final investment decision and acquired 3 Petronas subsidiaries undertaking the petrochemical project at the Refinery and Petrochemicals Integrated Development (RAPID) project in Johor for US$110mil. This RAPID project, which could later involve foreign equity partners, is expected to cost US$3.9bil with commencement scheduled for 2019. Assuming a project IRR of 12%, we estimate that the entire stake in this petrochemical project could generate an earnings accretion of RM1.8bil or 67% of FY15F earnings.

The stock is currently trading at a fair FY16F EV/EBITDA of 8.7x, which is above PTT Global Chemicals’ 5.7x.

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