PetChem likely to see robust earnings

Research house says olefins and derivatives division poised to gain from stronger product prices

PETALING JAYA: Despite posting lower net profit in the first quarter of the year, Petronas Chemicals Group Bhd (PetChem) is likely to see robust earnings through 2018, driven by its olefins and derivatives segment.

RHB Research, which expected PetChem’s earnings to stay robust, said the company’s olefins and derivatives division is poised to benefit from stronger product prices, while its fertilisers and methanol segment should remain stable.

“The market for olefins and derivatives is expected to be stable in the near term, drawing from the healthy downstream demand. The strong crude oil prices has caused naphtha-based feedstock prices to surge, but PetChem has a cost advantage, as its gas is supplied from the Petronas group, around 20% of its feedstock costs are from gas,” RHB Research explained.

In its report yesterday, the brokerage noted that PetChem’s cost advantage was the reason that its ebitda (earnings before interest, tax, depreciation and amortisation) margin was higher than that of its competitors.

As for PetChem’s fertilisers and methanol unit, the softening growth would likely be offset by expansion.

“The earnings base from this division would be stable year-on-year, as 2018 would see the first full-year contribution from the Sabah Ammonia Urea (Samur) plant in Sabah, which commenced opera- tions in the third quarter of 2017,” RHB Research said.

RHB Research reiterated its “buy” call on PetChem, with a target price of RM11.18 based on 21 times the estimated earnings for 2018.

PetChem’s shares yesterday 27 sen to close at RM8.43.

The petrochemical company reported lower earnings of RM1.1bil in its first quarter ended March 31, 2018, due to the strengthening of the ringgit against the US dollar and a foreign-exchange loss on its loans.

It said the earnings in the quarter fell 17.7% from RM1.3bil a year ago. Revenue, however, rose 5.4% to RM5bil from RM4.7bil a year ago. Earnings per share was at 13 sen compared with 16 sen previously.

During the quarter in review, PetChem achieved a plant utilisation rate of 100% compared to 99% fell a year ago due to better plant performance.

MIDF Research noted that PetChem’s earnings came in within expectations, with commendable plant utilisation rate despite turnaround activities.

“Management guided that 2018 will be another year with heavy turnaround activities. Despite this, the average plant utilisation rate for the group is expected to remain above 90%,” the brokerage said.

MIDF Research downgraded its recommendation on PetChem to “neutral” with an upward bias on heavy turnaround and flat earnings expected for 2018. It noted that PetChem’s share price had appreciated 13% year-to-date, rendering valuations to a two-year high level.

Despite the downgrade in recommendation, MIDF ascribed a higher target price of RM8.90 on PetChem, compared with RM8.72 previously. The revised target price was based on 16 times forward earnings.

Similarly, CIMB Research also downgraded PetChem to “hold” from “add”, with an unchanged target price of RM8.90.

“While we remain positive on PetChem’s earnings due to its investments in several new projects, including the Samur ammonia and urea plant, downstream specialty BPC and Rapid integrated refinery and petrochemical project, we think that PetChem’s earnings will be unexciting over the next 12 months due to the lower utilisation rates and limited upside from Polyethylene-naphtha margins as a result of potential new supply from US shale gas-based producers,” CIMB Research said.