Petronas Chemicals Group Bhd (Oct 21, RM6.01)
Maintain neutral at RM6.04 with target price of RM5.60: Outlook for the petrochemical industry remains unclear on global economic uncertainty. Petronas Chemicals (PetChem) is greatly exposed to the external risks given its high earnings sensitivity to the global macroeconomic situation. Exports accounted for 58% of its FY11 total revenue. China alone contributed 18%. A potential hard landing in China is likely to affect PetChem’s earnings.
The betas of petrochemical stocks are generally high. PetChem was badly hit during the recent market selloff (Sept 26), when its share price tumbled 17.5% compared with the FBM KLCI’s 9.6%. Downsides are expected to be more severe especially if we are in a secular bear market, which is a likely scenario.
We expect PetChem’s 3QCY11 results, due next month, to remain weak on sequential quarter comparison. We reckon that this is attributed to the extended methane gas curtailment, which limits production particularly from the fertiliser and methanol (F&M) segment, and the slowdown in olefins and derivatives (O&D) demand.
Prices of certain O&D have retreated 15% to 26% from this year’s high, reflecting softening demand. In 3QCY11, average price of ethylene, propylene, polyethylene and polypropylene was lower quarter-on-quarter (q-o-q) at US$1,086 (RM3,432) per tonne (12.2% q-o-q), US$1,480 per tonne (1.6% q-o-q), US$1,524 per tonne (4.3% q-o-q ) and US$1,536 per tonne (4.7% q-o-q) respectively.
However, ammonia and urea prices remain favourable gaining 1.5% q-o-q and 22.9% q-o-q to US$574 and US$503 per tonne. Note that profit contribution from the F&M segment increased to 24% in 2QCY11 compared with only 14% in 1QCY11. Higher product price may mitigate the negative impact of production disruption.
We do not foresee significant catalysts to boost PetChem’s valuation and share price in the near term. As such, we maintain our “neutral” call with unchanged target price of RM5.60, ascribing a multiple of 12.8 times.
The targeted price-earnings ratio is already a premium to PetChem’s peers’ average of 8.5 times considering its higher profit margin and cheaper feedstock.
We believe further downsides are cushioned by: (i) PetChem’s net cash position of 79 sen per share; and (ii) Easing in selling pressure as we understand that PetChem’s foreign shareholdings are in the low teens now, declining from the high teens early this year. — MIDF Research, Oct 21
This article appeared in The Edge Financial Daily, October 24, 2011.
Maintain neutral at RM6.04 with target price of RM5.60: Outlook for the petrochemical industry remains unclear on global economic uncertainty. Petronas Chemicals (PetChem) is greatly exposed to the external risks given its high earnings sensitivity to the global macroeconomic situation. Exports accounted for 58% of its FY11 total revenue. China alone contributed 18%. A potential hard landing in China is likely to affect PetChem’s earnings.
The betas of petrochemical stocks are generally high. PetChem was badly hit during the recent market selloff (Sept 26), when its share price tumbled 17.5% compared with the FBM KLCI’s 9.6%. Downsides are expected to be more severe especially if we are in a secular bear market, which is a likely scenario.
We expect PetChem’s 3QCY11 results, due next month, to remain weak on sequential quarter comparison. We reckon that this is attributed to the extended methane gas curtailment, which limits production particularly from the fertiliser and methanol (F&M) segment, and the slowdown in olefins and derivatives (O&D) demand.
Prices of certain O&D have retreated 15% to 26% from this year’s high, reflecting softening demand. In 3QCY11, average price of ethylene, propylene, polyethylene and polypropylene was lower quarter-on-quarter (q-o-q) at US$1,086 (RM3,432) per tonne (12.2% q-o-q), US$1,480 per tonne (1.6% q-o-q), US$1,524 per tonne (4.3% q-o-q ) and US$1,536 per tonne (4.7% q-o-q) respectively.
However, ammonia and urea prices remain favourable gaining 1.5% q-o-q and 22.9% q-o-q to US$574 and US$503 per tonne. Note that profit contribution from the F&M segment increased to 24% in 2QCY11 compared with only 14% in 1QCY11. Higher product price may mitigate the negative impact of production disruption.
We do not foresee significant catalysts to boost PetChem’s valuation and share price in the near term. As such, we maintain our “neutral” call with unchanged target price of RM5.60, ascribing a multiple of 12.8 times.
The targeted price-earnings ratio is already a premium to PetChem’s peers’ average of 8.5 times considering its higher profit margin and cheaper feedstock.
We believe further downsides are cushioned by: (i) PetChem’s net cash position of 79 sen per share; and (ii) Easing in selling pressure as we understand that PetChem’s foreign shareholdings are in the low teens now, declining from the high teens early this year. — MIDF Research, Oct 21
This article appeared in The Edge Financial Daily, October 24, 2011.
