PETRONAS CHEMICALS GROUP BHD

By Aminvestment Bank Research Rating: Hold (maintained) Fair value: RM7.80

AMINVESTMENT Bank Research has reaffirmed its earnings forecasts for the financial years of 2019-2021 (FY19-21), which were 2% to 8% above consensus estimates, following a teleconference for analysts on Nov 14.

The research house said that it expects Petronas Chemicals Group Bhd (Petchem) to record a core net profit of Rm3.7bil in FY19, Rm3.94bil in FY20 and Rm4.11bil in FY21.

Aminvestment Bank Research pointed out that Petchem’s production volume in the third quarter of FY19 (3Q19) fell by 21% quarter-on-quarter to 2.3 million tonnes, in tandem with the average in plant utilisation dropping to 81% from 103% in 2Q19.

This was a result of the turnaround activities (TA) at six facilities in Sabah and Kerteh that were undertaken over 40 to 43 days in 3Q19.

“As there are no scheduled TA in 4Q19, there would be no surprises and management hopes to achieve an overall plant utilisation of 100%, similar to 2Q19.

“Management expects lower TA in FY20 as the major maintenance projects were scheduled in 2017–19.

“In 1Q20, Petchem has a scheduled 30-day TA for its methanol plant in Labuan,” said Aminvestment Bank Research.

The research house expects Petchem’s maintenance expenditures, which stabilised around Rm800mil in FY18 and FY19, to be slightly lower in FY20 due to the lower TA.

Aminvestment Bank Research described the FY20 guidance by Petchem’s management for the Pengerang Integrated Complex’s (PIC) petrochemical operations appears to be slightly more optimistic, returning to 70% to 80% plant utilisation from a breakeven level of 60%.

“Petchem expects to reach PIC production stabilisation in 1Q20 with depreciation charges progressively rising in tandem with phased commencement schedules. This appears to be at a faster pace than the management’s earlier guidance for full utilisation over three years.

“Nevertheless, the management still indicates that FY20 earnings could be minimal, in line with our expectations,” it said.

Petchem currently trades at a reasonable FY20 enterprise value/earnings before interest, tax, depreciation and amortisation of nine times, near its five-year average, while its dividend yields are fair at 3%.