Petronas Chemicals - Recovery Within Sight

Petronas Chemicals held a conference call yesterday in conjunction with the release of  its  FY12  results.  All  in,  we  are  leaving  our  earnings  estimate  unchanged  and retain our NEUTRAL recommendation on the stock and its FV at RM6.40, pegged to 12x  FY13  EPS.  We  advocate  those  invested  in  the  stock  to  maintain  their  holdings as the it offers a dividend yield of 4.3% in FY13 and 4.5% in FY14, assuming a 50.0% dividend payout ratio.

Olefin & derivatives (O&D) business expected to improve. Its management highlighted that  its  O&D  business  was  challenging  in  2012  due  to  weaker  demand  and  narrower spreads.  However,  it  painted  a  more  positive  picture  for  2013  as  demand  is  expected  to recover, driven by the recovery in its key markets even as margins are expected to remain suppressed in the near term.

Methanol and urea prices to firm up. In its F&M business, methanol prices are expected to firm up due to low  production volumes in Iran. The same may be expected for urea as recent tenders in Indonesia are pricing it at USD20/USD30 above the market. On the other hand,  prices  for  ammonia  will  likely  remain  soft  as  key  buyers  such  as  India  and  China have switched to purchasing other products, leaving  large piles of inventory in the Middle East.  

Spending  to  expand  its  business.  The  company  paid  off  most  of  its  borrowings  and registered  zero  debt  and  a  cash  pile  of  RM9.3bn  as  at  31  Dec  2012.  Its  management guided that Petronas Chemicals will likely spend some RM600m in 2013 for maintenance projects and incur borrowings of some RM2bn for its project in Samur. Maintain  NEUTRAL.  All  in,  we  leave  our  earnings  estimate  unchanged  and  retain  our NEUTRAL recommendation on the stock with an unchanged FV of RM6.40 pegged to 12x FY13  EPS.  We  see  a  limited  upside  for  the  stock  given  that  it  is  trading  at  11.7x  FY13 EPS, while its global peers’ are merely trading at an average of 10x FY13 EPS. We believe that the premium is justified by the group’s relatively cheaper feedstock advantage. We advocate investors to maintain their holdings as the stock offers a dividend yield of 4.3% in FY13 and 4.5% in FY14, assuming 50.0% dividend payout ratio.

Source: OSK