Petronas Chemical - Dented by fire and feedstock shortages HOLD

- We downgrade our call on Petronas Chemicals Group (PChem) from BUY to HOLD, with a lower fair value of RM6.70/share (vs. an earlier RM8.20/share), pegged  to an FY13F EV/EBITDA of 7.5x – which is at a lower premium, down from 15% to 10% of Thailand’s PTT Global Chemicals’ 6.9x.

- We have cut PChem’s FY12F-FY14F earnings by 15%-17% as its 9MFY12 net profit of RM2,616mil was below expectations, coming in at 66% of our earlier FY12F earnings of RM3,975mil and 70% of consensus’ RM3,747mil. The group did not declare any quarterly dividend, as expected.

- PChem’s 3QFY12 net profit fell 13% QoQ to RM742mil largely due to a 5ppt EBIT margin compression to 25% arising from higher operating costs caused by:- (1) a fire on board one of MISC’s chemical tanker at Petronas’ Labuan jetty which led to a temporary plant shutdown in July this year, lowering plant utilisation at the methanol production facility, and (2) feedstock supply shortages which affected mainly the methanol/fertiliser segment. 

- YoY, the group’s 9MFY12 net profit decreased 12% due to:- (1) lower product prices for the olefin/polymer division together with higher feedstock costs, and (2) Lower plant utilisation at the methanol plant due to gas supply disruptions. Olefins & polymers accounted for 71% of PChem’s 9MFY12 net profit vs. 76% in 9MFY11. 

- We expect the group’s 4QFY12 results to be even more challenging due to an additional RM560mil charge from the discontinuation of the group’s vinyl business as well as generally weaker product prices since the end of September this year.

- The petrochemical price trends have been mixed since the beginning of last month due to the weakness in the global economy, notwithstanding flat crude oil prices. From October this year to date, polyethylene prices were down 6% while methanol fell 13%. But paraxylene prices were flat  while benzene rose 9%. 

- With the global economic outlook next year remaining uncertain amidst the unresolved European sovereign debt crisis, we expect petrochemical price trends to remain mixed over the next quarter. But looking at a longer price trend, ethylene prices are still up by 24%, paraxylene 16%, polyethylene prices by 16% and benzene 9% since June this year (See Charts 3-5). 

- The stock currently trades at a fair FY13F EV/EBITDA of 6.6x, which is almost at parity with PTT Global Chemicals.   

Source: AmeSecurities