AmResearch: PetChem still a buy but lower FV of RM7.05

AmBank Research has maintained a buy recommendation on Petronas Chemicals Group Bhd (PChem) but with a lower fair value of RM7.05 per share from an earlier RM7.70 per share. The counter closed at RM6.20 on Aug 19.

“We have cut PChem’s FY20–FY22 earnings by 15%–24% to account for a 5% drop in average product price assumptions. The group’s 1HFY20 core net profit of RM692 mil (-60% YoY) came in below expectations, accounting for 35% of our FY20F earnings and 38% of street’s.  

“As comparison, PChem’s 1H accounted for 52%–59% of FY17– FY19 net profits. Given the lower earnings, the group’s interim dividend of 5 sen represents a 6 sen reduction YoY.  

“YoY, the group’s 1HFY20 net profit fell 60% on lower product prices, further exacerbated by average plant utilisation decreasing slightly to 97% from 99% with the completion of turnaround activities for the main Terengganu cracker plant and Petronas Chemical Fertiliser Sabah S/B in late 2019. 

PChem’s 2QFY19 core net profit’s 63% slump QoQ to RM186 mil was due to sharply lower product prices even though its sales volume was higher with the plant utilisation rate at 100% (vs. 94% in 1QFY20).  

The olefin & derivatives division registered a 2QFY20 net profit of RM32 mil versus a loss of RM17 mil earlier due to an EBITDA reclassification of RM88 mil from the fertiliser and methanol (F&M) segment. 

This also partly contributed to the F&M’s net profit contraction of 45% QoQ to RM198 mil.  

PChem’s overall weaker earnings are in tandem with product price trends in 2Q2020 as crude oil prices fell 37% QoQ, naphtha 43%, ethylene 21%, polypropylene 12%, benzene 53%, paraxylene 35% and methanol 19% due to Covid-19-inflicted global demand. 

However, since April this year, product prices have risen with crude oil climbing 83% to US$45/barrel, naphtha up 2.2x, benzene 2.1x, ethylene 41% and polyethylene 16%, albeit some continuing softness in paraxylene, urea and methanol.  

AmResearch said with the upturn in crude oil prices, PChem’s earnings visibility has improved given that the group’s product prices have a high 3-year coefficient correlation of 81% to crude oil prices. 

“Additionally, the discount to the 5-year average polyethylene naphtha spread has narrowed to 19% from 31% in early June this year.  PChem currently trades at a fair FY21F EV/EBITDA of 8.4x vs. its 2-year average of 8.5x, while its dividend yields are attractive at 3% against the current low interest rate regime,” it added.

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