AmWatch - Petronas Chemicals : Improvements in 4Q, but outlook for petrochemical prices still mixed HOLD, 23 Feb 2015

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Petronas Chemicals : Improvements in 4Q, but outlook for petrochemical prices still mixed          HOLD

We maintain HOLD on Petronas Chemicals Group (PChem) with an unchanged fair value of RM5.30/share pegged to an FY15F EV/EBITDA of 7.5x – a 15% premium to Thailand’s PTT Global Chemicals’ (PGC) 6.5x. PChem has booked an impairment loss of RM262mil in 4QFY14 on assets relating to its butane-MTBE chain due to weaker market conditions.  Excluding the impairment loss, the group’s FY14 core net profit of RM2,727mil is within our and consensus estimates. The group declared an interim dividend of 8 sen/share for 4QFY14, bringing the total to 16 sen for the year. This is within the group’s historical payout ratio of 50%.

PChem’s 4QFY14 core net profit has improved by 15% QoQ to RM762mil due to a 78% improvement in fertilisers and methanol (F&M) segment’s profits. This was largely due to higher plant utilisation of 84% (vs. 64% in 3Q) for the division, driven by better plant reliability and improved methane gas availability at its methanol facilities.

On a YoY comparison, the group’s core net profit declined by 13% as the average selling prices (ASP) and spreads were lower due to the unfavourable market conditions for nearly all the products. Following the completion of major turnaround and maintenance shutdowns in 2013 and 2014, we expect its operations to improve with a higher plant utilisation of 83% in 2015 (FY14: 80%). The strength in the US dollar also provides some reprieve to the group given its largely USD-denominated revenues, while only about 60% of its costs are denominated in USD.

Prices for WTI crude oil, naphtha, benzene, granular urea, paraxylene, polyethylene, methanol and polypropylene have declined by 26%-52% since 31 October 2014, while granular urea improved by 7% (see charts 4 to 7). The outlook for petrochemical prices still appear mixed with ethylene expected to strengthen slightly while aromatics and urea will be under pressure from rising supply from China in 2HFY14.

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