KUALA LUMPUR: Affin Hwang Capital Research is retaining its Buy call for its large cap O&G top pick Petronas Chemical but with a lower target price of RM9.20 from its earlier RM10.30.
It said on Tuesday the ongoing trade talks between the US and China have weighed on oil market sentiment on fear of weaker global demand, and inevitably hurting petrochemical prices in the process.
“Our earnings cuts reflect the weaker price trend in 1Q19, which will likely persist into 2Q19 before a recovery in 2H19E,” it said.
Affin Hwang Research said prices for polyethylene products have fallen by 15% since 3Q18 on subdued demand and ample supply.
Benzene and methanol took the largest hits with price declines in the range of 30%-40%.
“We are of the view that global oil prices should rebound back to the US$70-US$75 a barrel, post a compromise in the ongoing trade talks, driving a recovery in product prices,” it said.
The research house lowered its 2019-20E EPS by 10%-11%, factoring in lower average selling prices for selected O&D products, but maintained its plant utilisation rate at 91% and USD/RM assumption.
“All in, we now project Petronas Chemical to report an EPS fall of 10% in 2019E (previously expected flat growth).
“The Pengerang petrochemical plants have started commissioning and target to complete by end-2019, with utilisation rate expected to reach 75% in FY20E. Our capex assumptions remain unchanged, factoring in RM3bil post RAPID start-up,” it said.
Affin Hwang Research foresees the upcoming 4Q18 results to be weaker sequentially, albeit still in line with its forecasts on weaker product prices – polyethylene, MEG and Benzene prices all retraced in the range of 10%-20%, methanol by 15% on-quarter, while urea held up pretty well, supported by the strengthening in USD/RM by 2% on-quarter in the company’s favour.
“Petronas Chemical’s share price has corrected by 16% since hitting a high of RM10.20 in November 2018, and largely priced in the negative news of low product prices in the near term, in our view.
“We revise down our 12-month target price to RM9.20 (from RM10.30) post earnings cuts but at an unchanged target PER of 17 times. Nevertheless, we continue to like Petronas Chemical’s long-term capacity expansion story when earnings start to contribute in 2020E, which would give a roll forward TP of RM10.50.
“The stock currently offers a decent dividend yield of 3.5% (50% payout assumption), in line with the historical average. We reaffirm our Buy call on an expected average selling price recovery in 2H19,” it said.
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