Petronas Chemicals - Prices rising in tandem with crude oil

We maintain our BUY call on Petronas Chemicals Group (PChem) with an unchanged fair value of RM8.30/share, pegged to a CY12F EV/EBITDA of 9x – which is at a 15% premium to PTT Global Chemicals’ 7.8x.

We maintain FY12F-FY14F earnings forecasts, which incorporate an average olefin/polymer and fertilizer/methanol price growth of 12% and 8%, respectively. 

PCG’s 9MFY Dec 11 net profit of RM2,621mil was below expectations, coming in at 7% below both our forecast and consensus’ annualised 12MFY11 projection of RM3,777mil. The group declared a final dividend of 8 sen/share, to raise the period’s total dividend to 16 sen – in line with our expectations. This translates into a payout ratio of 48%, close to our FY12F-FY14F assumption of 50%.

PCG’s December quarter fell 36% QoQ to RM735mil due to:- (1) an average 6% decline in overall product prices, (2) 15% contraction in sales volume due to lower demand, methane gas constraints and electricity interruption at the group’s ethylene cracker plant, and (3) halving of associate contribution due to lower margins and methane gas supply volume.

YoY, the group’s 9M FY Dec 2011 net profit rose 27% in tandem with a 29% increase in overall product prices, partly offset by:- 1) a 7% volume contraction arising from plant maintenance and methane gas constraints, 2) weaker US dollar, and 3) higher associate tax rates.Olefins & polymers accounted for 72% of PCG’s 9M FY Dec 2011 net profit, down YoY from 92% in the previous period due to the fertiliser/methanol’s 4.4x surge vs olefin/polymer’s 5% increase. This stemmed from higher product prices and volume which also improved the fertiliser/methanol’s net margins by 19ppts YoY vs. the olefin/polymer’s 1ppts decline.

Olefin/polymer and fertilizer/methanol prices have significantly risen since the beginning of the year, partly out of steady global demand, amid expectations of tighter supplies ahead of a number of Japanese and Korean crackers undergoing a seasonal maintenance period in 2Q2012. 

Since the beginning of January this year, polyethylene prices have surged 18%, methanol up 15%, benzene prices 12%, and polypropylene/paraxylene by 12%. With crude oil prices trading at above US$100/barrel, we believe PChem, given its low feedstock structure, is poised to benefit from a higher global oil price regime, partly driven by geopolitical uncertainties in the Middle-East, especially in Iran and Syria.

The stock currently trades at an attractive FY12F EV/EBITDA of 7.8x, which is half of Taiwan’s Formosa Petrochemicals’ 15x. We understand that PChem’s foreign shareholding remains in the mid-teens.

Source: AmeSecurities