KUALA LUMPUR: Higher product prices amid the rising crude oil price should drive stronger earnings for Petronas Chemicals Group Bhd (PetChem) in the current financial year (FY).

       During the three-month ended June 30, crude oil price rose 13% quarter-on-quarter (q-o-q) while polyethylene rose by only 4% q-o-q, which led to its five-year average discount to naphtha widening to 27%.

       However, AmInvestment Research (AmInvestment) noted that other products had improved more substantively q-o-q with benzene rising 42%, paraxylene 21%, urea 16% and methanol 12%.

       As such, AmInvestment expected the higher product prices to propel PetChem’s FY21 net profit by 2.6 times year-on-year (y-o-y) to RM4.85bil, which was similar to the normalised earnings achieved by the group in FY18 when the Brent crude oil averaged at US$73 (RM309.05) per barrel.

       The group is expected to announce its first half (H1FY21) results on Aug 25.

       “Recall that PetChem’s first quarter (Q1FY21) net profit surged 2.1 times q-o-q to RM1.46bil from higher product prices in tandem with crude oil prices, which surged by 32% q-o-q to an average US$61 (RM258.24) per barrel, despite a flattish sales volume.

       “Given a one to two-month time lag between product price movement and recognition in PetChem’s revenue, we expect H2FY21 earnings onwards to stage a stronger delivery as Brent crude oil prices traded at or above the US$70 (RM296.34) per barrel threshold currently versus a Q2 average of US$69 (RM292.11) per barrel,” the research house said in a report yesterday.

       It added that new capacity could boost future revenues.

       With product prices currently on an upswing, AmInvestment expected the group’s jointly-owned petrochemical plant in the Pengerang Integrated Complex (PIC) to break even at pre-tax levels.

       Assuming an operating margin of 10%, which is lower than 12% in Lotte Chemical Titan Holding Bhd’s Q2FY21 results given PetChem’s start-up costs, the brokerage estimated that the Pengerang division – together with its wholly-owned isononanol plant, which cost US$442mil (RM1.87bil) – could add about RM70mil annually to the group’s pre-tax profit upon full commencement.

       “As Petronas’ refinery and cracker have been delayed by the Covid-19 pandemic and earlier by an explosion in March last year, we have not incorporated any Pengerang contribution into FY21 earnings,” said AmResearch.

       On the flipside, PetChem has entered a fresh three-year cycle of high plant turnaround and maintenance activities in Kerteh, Gebeng, Labuan and Bintulu with FY21 capital expenditure (capex) expected to rise by 73% y-o-y to RM2.6bil from RM1.5bil in FY20.

       PetChem’s FY21 capex will comprise RM700mil for the turnaround of five major facilities, RM600mil for ongoing maintenance, RM650mil for its 50%-owned PIC new petrochemical operations and RM600mil for growth projects.

       The research house has opted to keep its FY21-FY23 earnings estimates for now, which are 18%-24% above consensus, pending PetChem’s Q2 results announcement later in the month.

       Given the improving earnings prospects of the group’s PIC operation in tandem with higher petrochemical price prospects, AmResearch opined that PetChem is currently trading at an attractive FY22 enterprise value to earnings before interest, taxes, depreciation, and amortisation ratio of 7.1 times, which is 17% below its two-year average of 8.6 times.

       As such, AmInvestment reiterated its “buy” call on the stock with an unchanged fair value of RM10.60.