Investment Highlights

• We maintain HOLD on Petronas Chemicals Group (PChem) with a lower fair value (FV) of RM6.22/share (from RM6.63/share), pegged to FY25F EV/EBITDA of 8x - at par to its 5-year average. Our revised FV also reflects our 4-star ESG rating, which accords a 3% premium .

• Our FV revision is to account for lower EBITDA margins from weak product spreads as prices remain flattish. Similarly, we adjust FY24-FY26F earnings downwards by - 22%-35%, reflecting a slower-than-expected recovery outlook for petrochemical product demand.

• PChem’s 1QFY24 core net profit (CNP) of RM480mil (excluding inventories write-off and net gain on foreign exchange) came in below expectations as the annualised result missed street’s forecast by 7% and ours by 10%.

• YoY, PChem’s 1QFY24 revenue slid 0.8% as the olefins & derivatives (O&D) division mostly offset the fertilisers & methanol (F&M) segment’s decline from lower plant utilisation due to higher statutory turnaround and plant maintenance activities. Following this, the group’s 1QFY24 CNP declined by a larger 29% as the effective tax rate (ETR) rose by +3.5pts together with higher minority charges.

• QoQ, the group’s 1QFY24 revenue grew sequentially by 4% due to stronger performance from the O&D and Specialties segments, underpinned by seasonal demand recovery and higher volumes from the Pengerang Integrated Complex (PIC). 1QFY24 CNP rose by 81% QoQ on the back of lower base, as the group’s EBITDA margin recovered to 16% (vs. 9% in 4QFY23) due to improved spreads and higher contribution from Perstop.

• Moving forward, we expect a gradual recovery in near-term earnings performance backed by stronger utilisation rates. However, we remain cognizant of the sluggish demand environment and believe product prices will remain flattish for now amidst slow economic growth and high inflation.

• PChem appears unattractive at a current FY24F EV/EBITDA of 10x, a 17% premium to its 5-year EV/EBITDA average of 8x and offers an unassuming dividend yield of 3%.

Source: AmInvest Research - 30 May 2024