Petronas Chemicals : Tenuous product price outlook HOLD

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Petronas Chemicals : Tenuous product price outlook       HOLD

We maintain our HOLD rating on Petronas Chemicals Group (PChem) with an unchanged fair value of RM6.32/share, pegged to a rolled-forward FY17F EV/EBITDA of 8x, which is its 2-year average. PChem’s FY16F-FY18F earnings are largely unchanged as its  9MFY16 core net profit of RM2,095mil was largely in line with expectations, accounting for 77% of our forecast and 78% street’s estimates of RM2,690mil. As a comparison, 9MFY15 accounted for 75% of FY15 net profit. The group did not declare a 3QFY16 interim dividend as expected. PChem’s 3QFY16 revenue rose 11% QoQ to RM3.6bil due to the increase in overall plant utilisation from 95% to 100% in the absence of any statutory turnaround activities, which occurred at the aromatics plant, supported by stable product prices. This drove the group’s 3QFY15 EBITDA margin by 1-ppts to 42% and net profit by 29% QoQ to R837mil.

On a YoY comparison, the group’s 9MFY16 core net profit as lower product prices offset the higher plant utilisation of 96% (vs. 85% in 9MFY15) and stronger US$. PChem’s overall 9MFY16 plant utilisation of 96% was above management’s earlier FY16F guidance of 90%. In FY17F, utilisation rates may decline to below 90% as the Kertih cracker is also scheduled for turnaround activities in 2Q-3QFY17. Management also affirmed that the ethane supply for the Kertih plant has been concluded with management indicating that the revised terms, which will be effective in October this year, are similar to the previous agreement which will have less than 3% erosion to the group’s FY17F EBITDA. For the rest of the year, the group’s product prices could be flat as crude oil prices have fallen to US$46/barrel from US$50/barrel since the beginning of October this year, which should have a close correlation with olefins and derivatives. Methanol and fertiliser price outlook remains challenging given ample global supply coupled with weak demand. We caution that the current trajectory of crude oil prices remains precarious on the tenuous OPEC agreement to reduce supply amid rising US inventories and slow pick up in global demand. The stock currently trades at a fair FY17F EV/EBITDA of 9x, slightly above its 2-year average of 8x.

Others :

MISC : Drifting into wintering season      HOLD

Petronas Gas : Boost from gas price revision offset by higher costs           HOLD

CB Industrial : Slower mill contract flow ahead?  HOLD

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