Petronas Chemicals downgraded to ‘hold’ due to narrowing upside
KUCHING: AmInvestment Bank Bhd (AmInvestment Bank) downgraded their recommendation on Petronas Chemicals Group (PChem) as the group’s six-month share price appreciation has narrowed the potential upside of its estimated fair value of RM8.35.
Since falling to a year low of RM6.85 on July 14, 2017, PChem’s share price had steadily appreciated to an all-time peak of RM8.19 on Jan 16 – representing a 19.56 per cent expansion.
While this has narrowed the potential upside of the bank’s fair value on the stock, PChem’s EV/ EBITDA multiple which is trading at a 1-year forward of 9 fold is still at a 16 per cent premium to peers such as Thailand’s PTT Global Chemicals who trades at a EV/ EBITDA of 8 fold, 3.5SD above its 3-year average.
Moreover the appreciation of Pchem’s share price might be indicative of a stronger performance from the group, but AmInvestment Bank expects that any further share price appreciation will be not be significant due to limited upside in crude oil prices.
“With crude oil prices lingering just below the US$70 per barrel range, we expect limited upside as the unusually cold winter season in the northern hemisphere recedes amid the unwinding of speculative futures positioning,” it said in a note yesterday.
The group’s produce prices have a strong correlation to Brent crude oil prices which have risen 20 per cent since September 30, 2017 to over US$68 per barrel.
In 4Q17, benzene has risen 29 per cent naphtha and polyethylene 10 per cent. However methanol has fallen by 5 per cent due to oversupply with the completion of regional facilities’ turnarounds.
“As such, given the 1- year correlation coefficient of 0.7 between PChem’s share price and Brent crude oil prices, we do not expect further significant share price appreciation,” the research bank explained.
For 2018, the bank’s view for crude oil price remains unchanged at US$55 to US$60 per barrel.
With that said, AmInvestment bank is maintaining their fair value and earnings estimates for the group as group’s 4QFY17 results which are scheduled to be released on Feb 20 are expected to come within expectations due to stable plant utilisation ate and the recent completion of a methanol facility.
“For this year, while a major cracker turnaround activity is scheduled in 3Q2018, management expects to achieve an overall average utilisation ate of over 90 per cent, similar to its 91 per cent in the first 9 months of FY17,” guided the bank.