Petronas Chemical - Deferred tax claw-back, restored methane supply HOLD

- We maintain our HOLD call on Petronas Chemicals Group (PChem), with a higher fair value of RM7.00/share (vs. an earlier RM6.70/share), pegged to an unchanged FY13F EV/EBITDA of 7.5x – which is at parity to Thailand’s PTT Global Chemicals.

- We have raised PChem’s FY13F-FY15F earnings by 3%-5% largely due to a 6% reduction in the group’s operating overheads. We also introduce FY15F net profit with a 16% growth, which incorporates contributions from the commencement of the 1.2 million-tonne Sabah Ammonia and Urea project costing RM4.7bil (US$1.5bil) in Sipitang.

- PChem’s FY12 net profit of RM3,518mil was within street’s estimates (-4%) but above our expectations (+6%) largely due to a positive 4QFY12 tax charge of RM169mil arising from deferred tax claw-backs in the fertiliser and methanol division. The group declared a final dividend of 14 sen/share to bring FY12 DPS to 22 sen, above our forecast of 18 sen.

- PChem’s 4QFY12 net profit rose 22% QoQ to RM902mil largely due to a 5x surge to RM890mil in contribution from the fertilizer and methanol division, which was boosted by:- (i) the recognition of RM432mil deferred tax assets, (ii) 3% increase in product prices, and (iii) stronger operational performance on restored methane feedstock supply as the group experienced lower methanol plant utilisation in 3QFY12 due to a temporary shutdown following a fire on board one of MISC’s chemical tankers at Petronas’ Labuan jetty. This more than offset the oneoff expenses of RM490mil (vis-à-vis management’s total estimate of RM560mil) arising from the discontinuation of the group’s vinyl business.

- Excluding one-off discontinuation expenses for the vinyl business, the group’s FY12 core net profit rose 6% due to the 71% increase the methanol & fertiliser division’s earnings, which benefited from significant deferred tax clawbacks and improved plant utilisation rates following the recovery in gas feedstock supply despite mixed prices. This was partially offset by lower product prices in the olefins and derivatives division.

- Generally, petrochemical price trends have improved since the beginning of the year with polyethylene prices up 15%, polypropylene 13%, methanol 13% and paraxylene 6%. These outpaced crude oil price, which rose by only 4%. But compared to a year ago, product price trends are mixed – paraxylene rose 6% and polyethylene up 2% vs. polypropylene decline of 12% and methanol down 2% amidst crude oil falling 9% (See Charts 3-5).

- With the global economic outlook next year remaining uncertain amidst the unresolved European sovereign debt crisis and potential US fiscal cuts, we expect petrochemical price trends to be mixed over the next few months. The stock currently trades at a fair FY13F EV/EBITDA of 6.5x, which is at a 13% discount to PTT Global Chemicals’ 7.5x.

Source: AmeSecurities