PCHEM (5183) - Petronas Chemical Group - Impairment loss a surprise
Target RM6.00 (Stock Rating: ADD)
PChem’s FY14 core earnings were 22% below our forecast and 11% below consensus due to weaker-than-expected olefins earnings and lower-than-expected utilisation rates from multiple shutdowns. We believe its earnings should recover in FY15-16, as rising volumes and improved supplies of gas feedstock and utilities should compensate for the weaker olefins margins from the lower oil price. We lower our FY15-16 forecasts to account for the weaker olefins margins, which reduces our target price to RM6.0, now based on 7x CY16 EV/EBITDA, the industry average (8x CY16 EV/EBITDA previously). We maintain our Add rating.
Weak 4Q14 and FY14 results
4Q14 core earnings of RM692m missed expectations due to weaker-than-expected olefins margins from the sharp decline in oil prices. Olefins EBITDA margin rose slightly to 32.7% in 4Q14 from 31.9% in 3Q14, compared to the sharp 25% qoq rise in olefins industry margins. Olefins EBITDA rose 10% yoy to RM877m thanks to the higher utilisation rate of 93%, up from 90% in 3Q14. Fertiliser group earnings improved significantly by 78% qoq to RM254m, driven by the higher utilisation rate of 84% (64% in 3Q14), as there were sufficient gas feedstock and utilities supplies. However, the real negative surprise came from PChem’s lower reported 4Q14 net profit which was dragged down by an impairment loss of RM262m for the butane-MTBE unit to reflect the poor industry outlook.
Weaker margin on lower oil price
As one of the two gas-based olefins producers in Asia, PChem’s olefins margins are projected to weaken due to the lower oil price. Hence, we cut our EPS forecasts for FY15-16 by 11.5-12.5%, to account for our oil price assumptions of US$70/bbl for 2015 and US$75/bbl for 2016.
An attractive olefins play
Despite the weaker olefins margin outlook on lower oil price, we believe PChem remains an attractive olefins play due to the industry margin upcycle which should continue in 2015-16. While PChem’s valuation may de-rate due to the lower competitiveness of its gas-based olefins, we believe its earnings growth will be driven by higher utilisation.
Source: CIMB Daybreak - 23 February 2015
Target RM6.00 (Stock Rating: ADD)
PChem’s FY14 core earnings were 22% below our forecast and 11% below consensus due to weaker-than-expected olefins earnings and lower-than-expected utilisation rates from multiple shutdowns. We believe its earnings should recover in FY15-16, as rising volumes and improved supplies of gas feedstock and utilities should compensate for the weaker olefins margins from the lower oil price. We lower our FY15-16 forecasts to account for the weaker olefins margins, which reduces our target price to RM6.0, now based on 7x CY16 EV/EBITDA, the industry average (8x CY16 EV/EBITDA previously). We maintain our Add rating.
Weak 4Q14 and FY14 results
4Q14 core earnings of RM692m missed expectations due to weaker-than-expected olefins margins from the sharp decline in oil prices. Olefins EBITDA margin rose slightly to 32.7% in 4Q14 from 31.9% in 3Q14, compared to the sharp 25% qoq rise in olefins industry margins. Olefins EBITDA rose 10% yoy to RM877m thanks to the higher utilisation rate of 93%, up from 90% in 3Q14. Fertiliser group earnings improved significantly by 78% qoq to RM254m, driven by the higher utilisation rate of 84% (64% in 3Q14), as there were sufficient gas feedstock and utilities supplies. However, the real negative surprise came from PChem’s lower reported 4Q14 net profit which was dragged down by an impairment loss of RM262m for the butane-MTBE unit to reflect the poor industry outlook.
Weaker margin on lower oil price
As one of the two gas-based olefins producers in Asia, PChem’s olefins margins are projected to weaken due to the lower oil price. Hence, we cut our EPS forecasts for FY15-16 by 11.5-12.5%, to account for our oil price assumptions of US$70/bbl for 2015 and US$75/bbl for 2016.
An attractive olefins play
Despite the weaker olefins margin outlook on lower oil price, we believe PChem remains an attractive olefins play due to the industry margin upcycle which should continue in 2015-16. While PChem’s valuation may de-rate due to the lower competitiveness of its gas-based olefins, we believe its earnings growth will be driven by higher utilisation.
Source: CIMB Daybreak - 23 February 2015
