Stock Name: PCHEM
Company Name: PETRONAS CHEMICALS GROUP BHD
Petronas Chemicals Group Bhd
(Oct 17, RM6.14)
Maintain buy at RM5.92 with target price of RM7.50: PetChem's share price has fallen by 11% from RM6.66 as at end-July 2011, underperforming the KLCI by 4%. We believe the poor share price performance is not only due to the broad-based weakness in global equity markets, but PetChem's high earnings sensitivity to Asia's economic growth and international crude oil price, as well as its earlier strong initial public offering (IPO price of RM5.04).
At its last traded price of RM5.92, PetChem is valued at an attractive 11.8 times CY12 price-earnings ratio, below the KLCI's PER of 13.2 times and listed Petronas peers average CY12 valuation of 16.4 times PER. We believe the current share price weakness offers investors a good buying opportunity into this well-run company because: (i) we see no major weakness or sell-off in polymers, urea and methanol markets; (ii) the US economy will not fall into a double dip recession and the eurozone's sovereign debt crisis will recede in the months ahead; and (iii) our economist's average crude oil price (WTI) forecast of around US$90 (RM280.80) to US$100 per barrel in 2012, supportive of our positive stance on polymers and urea prices.
Softer prices of polypropylene, HDPE and LDPE, which are now 5% to 10% lower, are mainly due to a decline in demand as some customers have held back purchases, waiting to get a clearer picture of the global economic direction. We note that the current prices of US$1,350 to US$1,480 per tonne are 16% to 28% higher year-on-year (y-o-y). Financial year-to-date (FYTD ' March/November) polymer prices have increased by 12% to 24% y-o-y. We expect polymer prices and demand to firm up once the global economic uncertainties subside and customers resume normal purchases. On the supply side, the current flooding in Thailand and recent fire at Shell's Singapore refinery are unlikely to have a major impact on Asia's polymer supply.
Notwithstanding the weakness in global equity markets and global economic uncertainties, urea and methanol prices have remained strong, rising by 23% and 4% from end-July. The current urea price is 65% higher y-o-y while methanol'' is 48% higher y-o-y. FYTD, urea prices have increased by'' 33% and methanol 28%. That said, we believe prices are likely to correct in the near term, as the flooding in Thailand and wet weather in Indonesia are likely to affect fertiliser demand given slower planting and fertilising.
We maintain our earnings forecast and reiterate our 'buy' rating on PetChem with an unchanged target price of RM7.50, based on 15 times CY12 earnings. We continue to like PetChem for: (i) its strong parentage; (ii) good governance; (iii) an experienced management team; (iv) cash flow and dividend prowess; and (v) trading liquidity. Re-rating catalysts are: (i) improvement in global equity market sentiment and risk appetite; (ii) rise in crude oil prices; (iii) robust Asian economic data points; (iv) a more active capital management (yielding a higher dividend payout); and (v) expansion projects.
Assuming the market were to value PetChem at 15 times CY12 PER (in line with the KLCI's historical average forward PER), PetChem's current share price of RM5.92 implies a 8% y-o-y decline in CY12 product average selling price. ' Affin IB Research, Oct 17
This article appeared in The Edge Financial Daily, Ocotber 18, 2011.
Company Name: PETRONAS CHEMICALS GROUP BHD
| Research House: AFFIN | Price Call: BUY | Target Price: 7.50 |
Petronas Chemicals Group Bhd
(Oct 17, RM6.14)
Maintain buy at RM5.92 with target price of RM7.50: PetChem's share price has fallen by 11% from RM6.66 as at end-July 2011, underperforming the KLCI by 4%. We believe the poor share price performance is not only due to the broad-based weakness in global equity markets, but PetChem's high earnings sensitivity to Asia's economic growth and international crude oil price, as well as its earlier strong initial public offering (IPO price of RM5.04).
At its last traded price of RM5.92, PetChem is valued at an attractive 11.8 times CY12 price-earnings ratio, below the KLCI's PER of 13.2 times and listed Petronas peers average CY12 valuation of 16.4 times PER. We believe the current share price weakness offers investors a good buying opportunity into this well-run company because: (i) we see no major weakness or sell-off in polymers, urea and methanol markets; (ii) the US economy will not fall into a double dip recession and the eurozone's sovereign debt crisis will recede in the months ahead; and (iii) our economist's average crude oil price (WTI) forecast of around US$90 (RM280.80) to US$100 per barrel in 2012, supportive of our positive stance on polymers and urea prices.
Softer prices of polypropylene, HDPE and LDPE, which are now 5% to 10% lower, are mainly due to a decline in demand as some customers have held back purchases, waiting to get a clearer picture of the global economic direction. We note that the current prices of US$1,350 to US$1,480 per tonne are 16% to 28% higher year-on-year (y-o-y). Financial year-to-date (FYTD ' March/November) polymer prices have increased by 12% to 24% y-o-y. We expect polymer prices and demand to firm up once the global economic uncertainties subside and customers resume normal purchases. On the supply side, the current flooding in Thailand and recent fire at Shell's Singapore refinery are unlikely to have a major impact on Asia's polymer supply.
Notwithstanding the weakness in global equity markets and global economic uncertainties, urea and methanol prices have remained strong, rising by 23% and 4% from end-July. The current urea price is 65% higher y-o-y while methanol'' is 48% higher y-o-y. FYTD, urea prices have increased by'' 33% and methanol 28%. That said, we believe prices are likely to correct in the near term, as the flooding in Thailand and wet weather in Indonesia are likely to affect fertiliser demand given slower planting and fertilising.
We maintain our earnings forecast and reiterate our 'buy' rating on PetChem with an unchanged target price of RM7.50, based on 15 times CY12 earnings. We continue to like PetChem for: (i) its strong parentage; (ii) good governance; (iii) an experienced management team; (iv) cash flow and dividend prowess; and (v) trading liquidity. Re-rating catalysts are: (i) improvement in global equity market sentiment and risk appetite; (ii) rise in crude oil prices; (iii) robust Asian economic data points; (iv) a more active capital management (yielding a higher dividend payout); and (v) expansion projects.
Assuming the market were to value PetChem at 15 times CY12 PER (in line with the KLCI's historical average forward PER), PetChem's current share price of RM5.92 implies a 8% y-o-y decline in CY12 product average selling price. ' Affin IB Research, Oct 17
This article appeared in The Edge Financial Daily, Ocotber 18, 2011.
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