Petronas Chemicals - Decent results but chemical prices have since fallen HOLD

- We downgrade our call on Petronas Chemicals Group (PChem) from BUY to HOLD with a lower fair value of RM6.80/share (vs. RM8.30/share earlier), pegged to a lower FY12F EV/EBITDA of 7.8x (9x earlier).

- Our EV/EBITDA target valuation for PChem is at a premium of 30% (from an earlier 15%) to Thailand’s PTT Global Chemicals’ 6x, as its share price has tumbled 26% since March this year, in tandem with concerns over an adverse adjustment of its revenue sharing formula with its parent company PTT and weak industry outlook.

- We have lowered FY12F-FY14F earnings forecasts by 6%-8%, by lowering our average price assumptions by 8% for olefin/polymer and by 3% for fertiliser/methanol. This stems from the significant decline in petrochemical prices following the 1QFY12 results.

- PChem’s 1QFY12 net profit of RM1,019mil was within expectations, coming in at 24% of our earlier FY12F earnings of RM4,234mil and 25% of consensus’ RM4,038mil. Thegroup did not declare any interim dividend, as expected.

- PChem’s 1QFY12 net profit rose 39% QoQ largely due to a 23% increase in sales volume from higher plant utilisation in the olefin/polymer and fertiliser/methanol segments. This drove the net margins of olefin/polymer higher QoQ by 4.4%-point to 25% and fertiliser/methanol segments by 3.3%-point to 28%. But the impact of higher plant utilisation was partly offset by a 6% decline in average product prices and a weaker US$, which we estimate depreciated by 4% QoQ. 

- YoY, the group’s 1QFY12 net profit rose 3% as higher fertiliser/methanol prices and plant utilisation rates were largely offset by lower share of associate contributions and higher effective tax rate due to full utilisation of initial capital allowances. Olefins & polymers accounted for 72% of PChem’s 1QFY12 net profit, similar to 4QCY11. 

- Since 1 April this year, polyethylene prices have fallen by 20%, methanol down 16%, and polypropylene by 25%. While PChem’s low feed-stock cost structure will partly cushion the full impact on the group, we expect some margin squeeze to arise in 2QFY12.

- With crude oil prices falling to US$90/barrel due to weakening global consumption demand against the backdrop of ongoing concerns over the destabilisation of the euro, we expect PChem’s share price to be capped.

- The stock currently trades at a reasonable FY12F EV/EBITDA of 8x, which is half of Taiwan’s Formosa Petrochemicals’ 15x. We understand that PChem’s foreign shareholding remains in the mid-teens.   

Source: AmeSecurities