Petronas Chemicals Group - Corrosive Mix

Date: 24/07/2019

Source  :  KENANGA
Stock  :  PCHEM       Price Target  :  7.70      |      Price Call  :  HOLD
        Last Price  :  6.99      |      Upside/Downside  :  +0.71 (10.16%)

The on-going trade spat between US and China has taken a toll on petrochemical prices, which saw ASP falling since end of last year with no sign of recovery yet. As such, this will compress spread further for 2Q-3Q19 from the already weak 1Q19 and exacerbated by scheduled shutdowns in the next two quarters. However, we believe the recent selldown should have priced in the negatives and maintain MP at revised TP of RM7.70.

Weak ASP to dent earnings. Although the persistently weak petrochemical prices since last year-end will continue to compress spread, the decline rate had somewhat tapered off recently. Even then, there is still no sign of price recovery any time this year given the USChina trade spat which has taken its toll on ASP as demand lags supply and worsened by high inventories and weaker demand both in China. This is especially so for MEG as the spot price in China has fallen sharply by c.40% in the one past year and c.15% YTD. Overall ASPs should have bottomed in 2Q19 and plateau off in 3Q19 and the average ASP for the year is likely to be at 1Q19 level. As such, the strong FY18 results are unlikely to repeat in the near term given that 2018 was an exceptional year with petrochemical prices rallying all year round.

Heavy planned shutdown to hit profit further. In the upcoming 2Q19 results release which scheduled for 13 Aug, plant utilisation (PU) is likely to be comparable to that of 95% in 1Q19 as the statutory turnaround was completed in Apr with a planned shutdown in May. To recap, 1Q19 had one statutory turnaround and one scheduled maintenance which saw its PU for Fertiliser & Methanol unit at 92% as compared to 100% at Olefins & Derivatives segment. All in, there are three turnaround activities in 3Q19, making it the higher shutdown quarter in 2019, while there is no planned shutdown in 4Q19. Overall PU in FY19 is likely to be the same as the level at 92% recorded in FY18. In view of the scheduled shutdowns in 2Q19 and 3Q19, earnings are likely to be negatively affected, especially for 3Q19. With this, PCHEM should have completed its 3-year heavy shutdown cycle in 2017 to 2019.

Cut FY19-FY20 estimates by 17-19% on weaker ASP. Given the weak ASP coupled with planned shutdowns, results for 2Q19 and 3Q19 are likely to be softer further from the already weak 1Q19 net profit of RM809m, which was the lowest quarterly profit in more than two years. On the other hand, the initial earnings contributions from RAPID are likely to be minimal, which could be just at breakeven given start-up costs. For now, PCHEM is unable to commit the operational date, pending the COD for the refinery as well as cracker plants, but should be by this year end. So far, we have not factored this expansion into our FY20 forecasts. In all, we have cut FY19 and FY20 earnings estimates by 17% and 19%, respectively, as we only have lowered our ASP assumptions to reflect the weak price outlook while other key assumptions remain unchanged. Correspondingly, our NDPS estimates were also adjusted proportionally based on 50% payout ratio.

Lower TP to RM7.70 but still MP. Post-earnings revision, we revised our target price to RM7.70 from RM8.75, which is based on an unchanged 3-year mean at FY20 PER of 15.5x from 14.3x previously. Given that the share price has fallen 17% YTD, we believe it should have priced in the negatives. However, consensus earnings forecast of RM4.1b is on the high side; hence, we may see earnings cut in the near future, which will affect sentiment. Nonetheless, we believe our target price is fair as it is at mean valuation and closer to the overall FBMKLCI’s valuation. Thus, we maintain our MARKET PERFORM rating for its decent net yield of c.3%.

Downside risk to our call includes petrochemical prices continuing to trend lower, which could lead to further spread compression.

Source: Kenanga Research - 24 Jul 2019

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