We upgrade PCHEM to OUTPERFORM following its conference call
yesterday, which reaffirmed the fact that FY12 earnings would be stronger than
our earlier expected. We are revising our FY12 estimates upwards by 11% on
likely higher petrochemicals prices in tandem with our higher crude oil price
assumption. The company revealed that its 1Q12 plant utilisation rate was at 89.8%,
just slightly below the 90% target. Going forward, managing the value chain with
high value products would be the key to drive profit margin higher while
maintaining the targeted plant utilisation rate at 90%. Our new price target of
RM7.46/share is based on a lower targeted PER of 14.5x, which is the recent
high after normalising from the peak of
20x in March 2011, and our CY13 EPS of 51.4 sen.
Utilisation helped to
push 1Q12 higher. Petronas Chemicals Group Bhd (PCHEM) had on Monday
reported a strong set of 1Q12 result due mainly to a higher plant utilisation.
The group achieved a 89.8% utilisation rate in 1Q12 as compared to 78.0% in the
preceding quarter. This was partly attributable to improved demand for Olefins
& Derivatives (O&D) products in the quarter as well as the fact that
4Q11 results were affected by a power interruption at its ethylene crackers. As
such, the plant utilisation rate at O&D rose to 95.2% from 89.0%. In
addition, improved methane gas supply for the methanol facility in Labuan
helped pushed the plant utilisation rate at Fertilisers & Methanol
(F&M) higher to 85.2% from 67.7%.
High value products
to drive future earnings. The commendable 1Q12 plant utilisation rate of
89.8% is just 0.2% below its 90% target.
Going forward, with the targeted utilisation rate remaining at 90%, managing
the value chain with higher value products is the way to improve the profit margin.
This includes specialty chemicals products, like one of it latest ventured
together with BASF in the Kuantan facility. Meanwhile, construction work of the
USD1.5b Sabah Ammonia Urea (SAMUR) project in Sipitang, Sabah, which had its
groundbreaking in Feb 2012, is progressing well to be completed by end 2014.
This new facility will support new earnings growth for PCHEM from FY15 onwards.
Fine-tuning FY12-FY13
estimates, introducing FY14 forecast.
We have revised upward our crude oil price assumption following our new house’s view in Mar 2012.
The new assumption for 2012 is an average price of USD101/bbl from USD97/bbl,
and USD107/bbl in 2013 from USD106/ bbl previously. We have kept our USD/MYR
assumption unchanged. In addition, we have tweaked volume growth estimates to
3% and 1% from 4% each in FY12-FY13 as our previous assumption was too
optimistic. That said, our plant utilisation rate assumption is 86.3% in
FY12 (87.1% previously) and 87.1% in
FY13 (90.1% previously), which is lower than management’s target of 90%. Given
the above changes, we are upgrading our FY12 estimate by 11% but cutting FY13
EPS by 12%. We are introducing our FY14 estimates where we expect the EPS to
grow 5% p.a. Our major assumption is for petrochemical prices to track crude
oil price movements.
Upgrade to
OUTPERFORM. For the YTD, the share
price of PCHEM has outperformed the KLCI by 5%. However, the valuation has
normalised from a peak of 20x in Mar 2011, and has been hovering around 14x in
the past ten months. We have rolled over our valuation base to CY13 from CY12
and consequently, derived a new price target for PCHEM of RM7.46/share at 14.5x PER, its recent PER
high in Oct 2011 (previous TP was RM7.02/share on 16.5x PER CY12 earnings).
With the change, we are upgrading PCHEM to an OUTPERFORM from a MARKET PERFORM
previously.
Source: Kenanga
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