Maybank Research has Buy calls on Petronas Chemicals, Lotte Chemical

Petronas Chemicals Bhd registered the highest net money inflow of RM9.47mil last week.

KUALA LUMPUR: Maybank Investment Bank Research has Buy calls on Petronas Chemicals and Lotte Chemical Titan (LCT) as the petrochemicals sector should fare well in 2018 on sustained global GDP growth and benign inflation.

It said on Wednesday Petronas Chemicals’ operations are strong and coupled with its fixed feedstock cost structure, this advocates that it will be a winner in 2018. 

However, there is a major factory turnaround scheduled for 3Q18, impacting 3Q18 earnings. 

“LCT will perform better in 2018 as it ramps up production rate and attains economies of scale. However we caution that rising naphtha price volatility is negative to its ability to maintain profit margins. Valuation wise, it is the cheapest Asean-based petrochemical company,” it said.

To recap, Maybank Research said the industry’s new capacity output is manageable and demand-supply is forecasted to be balanced, thus providing a stable outlook on average selling prices.

“We believe factory utilization rate will be the main consideration for investment picks. Petronas Chemicals is our top pick as it is a beneficiary of higher crude oil prices as its feedstock cost is relatively fixed, thus ensuring margin expansion. 

“Production ramp-up will drive LCT’s earnings growth but it is susceptible to naphtha price volatility which is on an uptrend,” it said.

Maybank Research said global demand for petrochemicals was forecasted to grow by 4.4% in 2018, which is above the historical growth rate of 4.0%. 

Underpinning the growth would be global GDP growth of e.3.6% and benign core inflation of 3.3%.

Global PMI numbers have firmly been on expansion territory and this gives a positive indication for petrochemical demand.  

The total new global supply in 2018 is expected to be 20% lower than 2017’s levels based on forecast by ICIS Consulting — a reputable industry observer.  

Bulk of the new capacity stems from the US and China. 

“We are confident that these new capacity will be absorbed by the market and operating rates for all major petrochemical products should track higher with the exception of polyethylene. 

“This is due to many big scale ethane crackers coming on stream in the US which will cause some pricing pressure initially but we think it will eventually stabilise,” it said.