Petronas Chemicals on neutral ground

by **Cals** Tue 11 Jun 2013, 10:59

Petronas Chemicals on neutral ground
Business & Markets 2013
Written by Maybank IB Research
Tuesday, 11 June 2013 10:42

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Petronas Chemicals Group Bhd
(June 10, RM6.62)
Maintain hold at RM6.60 with a revised target price of RM6.70 (from RM6.75): PetChem performed exceptionally well in the first quarter of 2013 (1Q13) due to a record utilisation rate of 92.8% and 7% higher average selling prices (ASPs) year-on-year (y-o-y) to US$1,173 (RM3,671) per tonne.

Things are looking more challenging into 2Q13 and 3Q13 as ASPs have declined and the global manufacturing momentum has somewhat abated. We have tweaked our FY13 to FY15 earnings forecasts by -0.1% post results housekeeping, and lower our price target to RM6.70 (from RM6.75) based on an unchanged 12.8 times 2013 price-earnings ratio in line with global peers. We are maintaining our “hold” call due to limited upside to our target price.

We expect a lower utilisation rate into 2Q13 and 3Q13 due to scheduled maintenance activities. 3Q13 utilisation in particular could be low due to the shutdown of its main cracker plant for heavy maintenance, resulting in two to three weeks of downtime.

On the positive side, natural gas feedstock supply has been very good, and we expect PetChem to achieve a higher overall plant utilisation rate of three percentage points y-o-y to 86% this year.

Product prices have risen steadily since November last year, buoyed by encouraging Purchasing Managers Index numbers globally. But things have since abated in mid-March, as manufacturing numbers are only up moderately on a y-o-y basis.

The supply-demand relationship is balanced in 2Q13, as opposed to the undersupply situation in 1Q13 and petrochemical prices have softened since then to reflect the fundamentals. PetChem’s year-to-date ASP are up by 2.7%, which is close to our base forecast of a 3% increase in ASPs for 2013.

PetChem has many great attributes — it is free of debt, has RM10.7 billion of cash in its coffers and generates a free cash flow of more than RM2 billion per annum.

However, its growth prospect is limited as there is no new capacity up to 2015, and any growth is premised on higher ASPs, which we forecast to be rather flat in the near term. We recommend a “hold” for its respectable dividend yields of 4%. — Maybank IB Research, June 10

This article first appeared in The Edge Financial Daily, on June 11, 2013.