AmInvestment Research upgrades Petronas Chemicals to Buy

Petronas Chemicals will have a positive cash flow impact by decreasing its capex commitment as a result of Saudi Aramco

KUALA LUMPUR: AmInvestment Research has upgraded Petronas Chemicals from Hold to Buy with a higher fair value of RM8.35 a share from an earlier RM8.30 a share.

It said on Tuesday it had removed the one standard deviation premium from its rolled forward target FY18F enterprise value/earnings before interest, tax, depreciation and amortisation (Ebitda) to 8.2 times, on par with its three-year average given the close correlation of oleochemical prices to crude oil volatility. 

“We have raised PChem’s FY17F-FY19F earnings by 15%-22% from a two percentage points  increase in average product prices and 7-11 percentage points  reduction in effective tax rates to 12%-16% as the group shifts its marketing operations to Labuan to benefit from the 3% tax rate under the Global Incentive for Trading. 

“Our forecasts, which were already 9%-18% above consensus, are now even higher by 26%-46%,” said the research house.

AmInvestment Research said PChem’s 1QFY17 net profit of RM1,295mil exceeded expectations, accounting for 36% of its FY17F earnings and 39% of street’s estimates of RM3,297mil. 

As a comparison, 1QFY16 accounted for only 19% of FY16 net profit. 

“We note that the earnings increase was driven more by the fertiliser and methanol segment (FM), which climbed 67% on-quarter vs. 22% for the olefin and derivatives division (OD).

“Hence, the FM division accounted for 33% of 1QFY17 profit after tax vs. 26% in 4QFY16. With our higher earnings forecasts, the stock now trades at an attractive FY18F EV/Ebitda of seven times currently below its three-year average of 8.2 times,” it said.