KUALA LUMPUR: CIMB Equities Research is retaining its Hold call for Petronas Chemicals and target price of RM7.50, which is based on 7.5 times CY18F enterprise value/earnings before interest, tax, depreciation and amortisation (EV/Ebotda) which is on par with the industry average.
It said on Friday PChem’s 2Q17 net profit was 4% above its expectation but 7% below Bloomberg consensus, reflecting the weaker olefin margins and lower utilisation rates.
“We see limited upside in FY17F on lower 2H17F utilisation due to shutdowns, weaker ethylene prices with the upcoming new supply, and downside risks to oil prices.
“We expect earnings to decline in 2H17F, especially in 4Q17F due to the weaker olefin margin outlook,” it said.
To recap, CIMB Research said PChem posted 2Q17 net profit of RM964mil, up 108.7% on-year but down 25.6% on-quarter. The latter was due to lower utilisation rate and Ebitda margin.
Utilisation rate dropped to 94% from 95% in 1Q17 and 2Q16 due to the scheduled shutdown of MTBE's plant, which also caused Ebitda margin to decline to 38% in 2Q17 from 41% in 1Q17.
PChem saw lower-than-normal tax rate of 12% vs. its normal 15-20% due to a one-time tax benefit from its Sabah Ammonia and Urea (SAMUR) project.
The operations of both the olefins & derivatives group (O&D) and fertiliser & methanol group (F&M) declined on-quarter but improved on-year in 2Q17, with lower utilisation rates due to the impact of MTBE's plant shutdown.
O&D net profit declined 34% on-quarter to RM615m, dragged down by lower utilisation.
F&M net profit dropped 12% on-quarter, dragged down by lower demand and weaker product margins.
Both O&D and F&M saw on-year higher net profit due to the major maintenance shutdowns in 2Q16.
Since its startup in Apr 2017, the SAMUR plant (capacity: 740ktpa ammonia and 1.2mtpa urea) has run on a high utilisation rate of over 90%.
PChem's overall utilisation rate was 90%; 89% if excluding SAMUR.
“However, we estimate that SAMUR contributed less than 5% Ebitda margin or RM5mil net profit in 2Q17. We expect SAMUR's net profit contribution to increase to RM30mil to RM50mil in 2H17F, potentially partly offsetting the earnings decline from scheduled maintenance shutdowns and lower product margins.
“While 1H17 net profit formed 71% of our FY17 forecast we maintain our net profit estimate as we project 2H17 net profit to be significantly lower than 1H17's.
"The key drags include 1) planned shutdowns for major olefin units in 3Q17 and methanol #1 plant in 4Q17F, leading to lower utilisation rates of 85-90% for both the O&D and F&M units vs. 90-98% in 1H17; and 2) potentially weaker ethylene and HDPE prices and margins due to the upcoming new supply from US shale gas-based ethane crackers in 4Q17F-FY18F.
“We see limited upside for the stock as we project 1) a decline in its ethylene and downstream product prices and margins (HDPE) due to the upcoming new supply, 2) higher tax rate, and 3) lower sales volume in 2H17F.
“We think the market is too bullish on the ethylene price and margin and this could be a downside risk for PChem’s earnings and share price in 2017, in our view. Upside risks to our Hold call include higher-than-expected oil prices and rising ethylene prices,” it said.