Petronas Chemicals Group - 2Q19 Inline; Looking To A Weak 3Q19

Date: 14/08/2019

Source  :  KENANGA
Stock  :  PCHEM       Price Target  :  7.70      |      Price Call  :  HOLD
        Last Price  :  7.51      |      Upside/Downside  :  +0.19 (2.53%)

We view the strong 2Q19 results, with earnings soaring 40% QoQ to RM1.12b, as not sustainable with scheduled heavy statutory turnarounds in 3Q19 to hit bottom-line. In addition, the price outlook in 3Q19 remains lacklustre with no sign of recovery just yet. The share price, already weaker by 22% YTD, should have reflected all near-term negatives. Thus, keeping MP call at RM7.70, which is supported by 3% yield.

Strong 2Q19 but not sustainable. At 55%/48% of house/street’s FY19 estimates, 1H19 core profit of RM1.92b seems to beat our estimate, but is inline with the consensus on the surface, as 2Q19 raked in a 40% jump in net profit, largely attributed to prefect plant utilisation (PU). However, the strong 2Q19 performance is unlikely to sustain into 2H19, especially with 3Q19, having three heavy statutory turnarounds (TA) which is likely to impact earnings substantially. As such, we consider our forecast as on track and expect market to trim earnings further. Meanwhile, it declared 1H19 NDPS of 11.0 sen, (exdate: 27 Aug; payment date: 13 Sep) which is lower than the 14.0 sen paid in 1H18.

Sequential results largely led by utilisation… 2Q19 core profit leapt 40% QoQ to RM1.12b from RM0.80b on the back of 5% hike in revenue, boosted largely by higher PU of 103%, with record production volume of 2,913 MTPA, which rose 10%, from 95% previously. This was on the back of 97% PU from 100% at Olefins & Derivatives (O&D) as two shutdown activities were completed on time and there were build-ups inventory in anticipating the upcoming TAs in 3Q19 while Fertiliser & Methanol (F&M) achieved 107% PU from 92% on optimum operations. On the other hand, ASP remained weak with overall ASP falling 5% at O&D and >1% for F&M. This resulted in O&D’s EBITDA declining 11% to RM649m as revenue fell 15% while F&M’s EBITDA jumped 56% to RM913m as revenue leapt 45%.

…but weakened ASP weighed on yearly results. YTD, overall ASP for O&D contracted by 18% while F&M also saw its overall ASP declining 8% since the beginning of the year which weakened spread. As such, 2Q19 core profit fell 22% YoY from RM1.44b as revenue dropped 8% while 1H19 core earnings thumped down 28% to RM1.92b from RM2.58b in 1H18 as revenue decreased 12%. However, the strengthening of USD against MYR somewhat offset the negativity. Meanwhile, overall 2Q19 PU rose from 95% in 2Q18 on the back of 107% PU at F&M as mentioned above from 99% while O&D’s PU improved to 97% from 88% previously. YTD, overall PU improved slightly to 99% in 1H19 from 98% previously.

Price outlook remains lacklustre with three TAs in 3Q19. There is still no sign of price recovery, albeit stabilising, with continued downside pressure on polymers and methanol on demand lagging supply. On the other hand, three TAs are scheduled in 3Q19, which is expected to impact earning negatively. As such, we expect 3Q19 earnings are likely to be lower than 1Q19 of RM802m. 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 it should be by this year-end. Management expects 60% PU in first year of operations and reaching full operation in three years.

Still MARKET PERFORM. Share price has fallen 22% YTD, which reflects the earnings risk arising from depressed petrochemical prices with no sign of recovery just yet. With 3Q19 results anticipated to be weaker, we believe MARKET PERFORM rating is best for now with an unchanged target price of RM7.70, which is based on 3-year mean FY20 PER of 15.5x. Our recommendation is also supported by a decent yield of 3%. Upside risk to our call includes a sudden surge in petrochemical prices, which could lead to a higher spread.

Source: Kenanga Research - 14 Aug 2019

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