June 1, 2011

PCHEM - Utility hikes dampener on PetChem's earnings

Stock Name: PCHEM
Company Name: PETRONAS CHEMICALS GROUP BHD
Research House: AMMB

Petronas Chemicals Group Bhd
(June 1, RM7.24)
Maintain buy at RM7.24 with fair value of RM8.43
: We maintain our 'buy' call on Petronas Chemicals Group (PetChem) but with a slightly lower fair value of RM8.43, pegged to an unchanged FY12F earned value-earnings before interest, tax, depreciation and amortisation (EV/Ebitda) ratio of 10 times, a 15% discount to the region's average of 12 times.

The government has announced the price of natural gas will be raised by RM3 per mmbtu every six months from yesterday to Dec 1, 2015. Tenaga Nasional Bhd is also raising its electricity tariff by an average 7.12% from yesterday, with industrial rates rising by an average of 8.3%.

We believe that PetChem's electricity and natural gas costs, which are affected by this hike, fall under the group's energy and utilities category which accounted for 12% of FY10 cost of revenue. PetChem's gas feedstock costs, which are separately contracted with Petroliam Nasional Bhd and accounted for 58% of FY10 cost of revenue, are not impacted by this change in gas price.

PetChem has announced that the volume of gas subject to the tariff adjustment for the seven-month period from June 1 to Dec 31, 2011 is estimated at seven million mmbtu. This means that its annual costs will gradually increase by RM54 million in FY12F, RM108mil in FY13F and by RM216 million in FY14F.

We estimate that electricity costs amount to RM250 million annually. Assuming that industrial electricity rates are raised by 8% every six months with the RM3 mmbtu increase in gas costs, we estimate that power costs will rise by RM20 million in FY12F, RM62mil in FY13F and by RM135 million in FY14F.

All in, we have reduced our earnings estimate by 1% for FY12F, 3% for FY13F and 5% for FY14F. Note that we will be adjusting our forecasts for the change in financial year-end from March to December 2011.

The electricity and gas rate hikes are a negative development for PetChem but the impact appears manageable over the next three years. As petrochemical prices have a high correlation to naphtha, a by-product of oil refining, we remain sanguine about PetChem's earnings outlook with crude oil prices currently at the US$100 (RM300) per barrel level.

The stock currently trades at an attractive CY11F EV/Ebitda of nine times, a 20% discount to the average regional valuation of 12 times. Additionally, CY11F dividend yield of 4% is on par with regional valuations. ' AmResearch, June 1


This article appeared in The Edge Financial Daily, June 2, 2011.

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