PCHEM (5183) : Petronas Chemical Group - Return of feedstock supply risk
Target RM6.50 (Stock Rating: HOLD)
Despite the rising industry margin PChem’s 3Q14 result was disappointing, 27% below our and 12% below consensus forecasts. 9M14 core earnings was only 66% of our forecast, dragged down by the methane shortage that has been a drag to the fertilizer group since 2010. We cut our EPS forecasts and downgrade PChem from Add to Hold. Our target price is cut to RM6.5, based on 8x CY16 EV/EBITDA to reflect our lower utilization rate assumptions.
Weak 3Q14 result
PChem’s 3Q14 core earnings were weaker than expected at only at RM661m, 27% below our forecast and 12 below consensus estimate. Despite the continued rising olefins margins PChem’s earnings were dragged down mainly by its own problems of methane gas feedstock shortage for its methanol plants in Labuan due to the technical problem of its vessel FPSO. Olefins group saw a weaker than expected earnings of RM562m despite the higher utilisation rate from 78% in 2Q14 to 90% after the planned shutdown. Fertiliser posted a weak earnings of RM143m, down sharply by 45% qoq due to declining utilisation rate to 64%. EBITDA margin dropped to 31%, dragged down by the poor EBITDA margin for fertiliser group of 26%, down from 40% in 2Q14, due to the methane supply shortage. EBITDA margin for olefins remained solid driven by the high price of HDPE and the wider margin for PE products.
Rising operating risk
We cut our EPS forecasts for 2014-16 by 18-21% to reflect our assumptions of lower utilisation rates for olefins and fertiliser plants. Since 2010PCHem has seen consecutive operation disruptions including unplanned and maintenance shutdowns, utilities and water shortages, and the methane shortage.
Switch to PTTGC
We prefer PTTGC over PChem given 1) PTTGC’s more sustainable earnings growth on its superior operation efficiency. 2) PTTGC’s more attractive valuation (PTTGC’s 6x CY15 EV/EBITDA vs 8.2x for PChem). We believe PTTGC will be a better play on the olefin industry uptrend given its olefin volume and earnings growth will be stronger in 2015-16 driven by improved volume of gas feedstock post the return of GSP#5 to normal operation in 3Q14.
Source: CIMB Daybreak - 07 November 2014
Target RM6.50 (Stock Rating: HOLD)
Despite the rising industry margin PChem’s 3Q14 result was disappointing, 27% below our and 12% below consensus forecasts. 9M14 core earnings was only 66% of our forecast, dragged down by the methane shortage that has been a drag to the fertilizer group since 2010. We cut our EPS forecasts and downgrade PChem from Add to Hold. Our target price is cut to RM6.5, based on 8x CY16 EV/EBITDA to reflect our lower utilization rate assumptions.
Weak 3Q14 result
PChem’s 3Q14 core earnings were weaker than expected at only at RM661m, 27% below our forecast and 12 below consensus estimate. Despite the continued rising olefins margins PChem’s earnings were dragged down mainly by its own problems of methane gas feedstock shortage for its methanol plants in Labuan due to the technical problem of its vessel FPSO. Olefins group saw a weaker than expected earnings of RM562m despite the higher utilisation rate from 78% in 2Q14 to 90% after the planned shutdown. Fertiliser posted a weak earnings of RM143m, down sharply by 45% qoq due to declining utilisation rate to 64%. EBITDA margin dropped to 31%, dragged down by the poor EBITDA margin for fertiliser group of 26%, down from 40% in 2Q14, due to the methane supply shortage. EBITDA margin for olefins remained solid driven by the high price of HDPE and the wider margin for PE products.
Rising operating risk
We cut our EPS forecasts for 2014-16 by 18-21% to reflect our assumptions of lower utilisation rates for olefins and fertiliser plants. Since 2010PCHem has seen consecutive operation disruptions including unplanned and maintenance shutdowns, utilities and water shortages, and the methane shortage.
Switch to PTTGC
We prefer PTTGC over PChem given 1) PTTGC’s more sustainable earnings growth on its superior operation efficiency. 2) PTTGC’s more attractive valuation (PTTGC’s 6x CY15 EV/EBITDA vs 8.2x for PChem). We believe PTTGC will be a better play on the olefin industry uptrend given its olefin volume and earnings growth will be stronger in 2015-16 driven by improved volume of gas feedstock post the return of GSP#5 to normal operation in 3Q14.
Source: CIMB Daybreak - 07 November 2014
