KUCHING: Petronas Chemicals Group Bhd’s (Petronas Chemicals) strong margins are pegged by RHB Research Institute Sdn Bhd (RHB Research) to be sustainable, so much so that it considers the group’s margins “amongst the best in the world.”
According to RHB Research, Petronas Chemicals’ margins for its quarterly earnings before interest, tax, depreciation and amortisation (EBITDA) at the 30 per cent range puts the firm amongst the most profitable petrochemical companies in the world.
This comes as the research house expects full-year plant utilisation to reach 87 per cent excluding the Sabah Ammonia Urea (SAMUR) project, which will help in lowering Petronas Chemicals’ unit cost of production and maintain the group’s EBITDA margins.
“Petronas Chemicals’ nitrogen fertiliser prices are stabilising, after being weighed down for the past few years due to low crop prices and oversupply,” it highlighted. “However, we believe prices are close to the bottom, as these risks have been taken into account.
“Thus, second quarter of 2016 (2Q16) fertiliser earnings are expected to be similar to 1Q16 on a quarter on quarter (q-o-q) basis, but lower year on year (y-o-y).”
Meanwhile, in tandem with the rise in crude oil price, the research house noted that olefins and derivatives (O&D) prices are up on a quarterly basis but lower on a yearly comparison.
“We expect outages at several ethylene plants around the region to create a tight supply, driving up prices, helped by the higher crude oil prices,” it added.
As for methanol, RHB Research expected prices to remain stable and inch higher on the back of higher crude oil price.
“Oversupply from China remains a risk, although low utilisation rate for methanol plants in the country would offset the excess capacity. We expect q-o-q methanol numbers to be flat, while y-o-y performance to be lower,” the research house said.
Overall, RHB Research upgraded the company to a ‘buy’ as the research house expected the O&D segment to register better earnings on higher crude oil price, stable utilisation, as well as tighter supply from outages in the region.
The research house believed fertiliser prices are close to finding the bottom, as the market has probably taken into account low crop prices – as well as the oversupply of nitrogen fertilisers in the market.
RHB Research valued Petronas Chemicals at RM7.86 per share, based on 19-fold price earnings (P/E), as the research house rolled over its valuation to financial year 2017 forecast, a 20 per cent premium over the group’s peers owing to its superior margins as well as expectations of price recovery.
The research house’s corroborative discounted cash flow valuation implies a target price of RM7.74 per share.
“The key risks to our forecasts would be lower product prices and unexpected shutdowns,” it said.