Petronas Chemicals Group Bhd
(Aug 14, RM7.31)
Maintain market perform with an unchanged target price (TP) of RM7.70: At 55% and 48% of house and street’s financial year ending 2019 (FY19) estimates, Petronas Chemicals Group Bhd’s (PetChem) first half of FY19 (1HFY19) core profit of RM1.92 billion seems to beat our estimate, but is in line with the consensus on the surface, as 2QFY19 net profit jumped 40%, largely attributed to prefect plant utilisation (PU). However, its strong 2QFY19 performance is unlikely to be sustained into 2HFY19, especially in 3QFY19, with three heavy statutory turnarounds (TA), which are likely to impact earnings substantially. As such, we consider our forecast as on track and expect the market to trim earnings further. Meanwhile, PetChem declared 1HFY19 net distribution per share of 11 sen, (ex-date: Aug 27; payment date: Sept 13) which is lower than the 14 sen paid in 1HFY18.

Core profit for 2QFY19 leapt 40% quarter-on-quarter to RM1.12 billion from RM800 million on the back of a 5% hike in revenue, boosted largely by higher PU of 103%, with a record production volume of 2,913 tonnes per annum, which rose 10% from 95% previously. This was on the back of 97% PU from 100% at olefins and derivatives (O&D) division as two shutdown activities were completed on time and there were build-up inventory in anticipation of the upcoming TAs in 3QFY19 while fertilisers and methanol (F&M) division achieved 107% PU from 92% on optimum operations. On the other hand, average selling price (ASP) remained weak with overall ASP falling 5% at O&D and more than 1% for F&M. This resulted in O&D’s earnings before interest, taxes, depreciation and amortisation (Ebitda) declining 11% to RM649 million as revenue fell 15% while F&M’s Ebitda jumped 56% to RM913 million as revenue jumped 45%.

Year to date (YTD), overall ASP for O&D contracted by 18% while F&M declined 8% since the beginning of the year which weakened spread. As such, 2QFY19 core profit fell 22% year-on-year from RM1.44 billion as revenue dropped 8% while 1HFY19 core earnings thumped down 28% to RM1.92 billion from RM2.58 billion in 1HFY18 as revenue decreased 12%. However, the strengthening of the US dollar against the ringgit somewhat offset the negativity. Meanwhile, overall 2QFY19 PU rose from 95% in 2QFY18 on the back of 107% PU at F&M as mentioned above from 99%, while O&D’s PU improved to 97% from 88% previously. YTD, overall PU improved slightly to 99% in 1HFY19 from 98% previously.

Price outlook remains lacklustre with three TAs in 3QFY19. There is still no sign of price recovery, albeit stabilising, with continued downside pressure on polymers and methanol on demand lagging supply. On the other hand, three TAs are scheduled for 3QFY19, which is expected to impact earning negatively. As such, we expect 3QFY19 earnings to be likely lower than 1QFY19 of RM802 million. However, initial earnings contributions from Petronas Refinery and Petrochemical Integrated Development (Rapid) are likely to be minimal, which could be just at breakeven given its start-up costs. For now, PetChem is unable to commit the operational date, pending the commercial operation date for the refinery as well as cracker plants, but it should be by this year end. PetChem management expects 60% PU in the first year of operation and full operation in three years.

PetChem’s share price has fallen 22% YTD, which reflects the earnings risk arising from depressed petrochemical prices with no sign of recovery just yet. With 3QFY19 results anticipated to be weaker, we believe “market perform” rating is best for now with an unchanged TP of RM7.70, which is based on three-year mean financial year ending 2020 price-earnings ratio of 15.5 times. Our recommendation is also supported by a decent yield of 3%. Upside risk to our call includes a sudden surge in petrochemical prices, which could lead to a higher spread. — Kenanga Research, Aug 14