Highlights

Petronas Chemical - Weak ASPs, and Pengerang Loss Not Priced in

Date: 14/11/2019

Source  :  AffinHwang
Stock  :  PCHEM       Price Target  :  6.40      |      Price Call  :  SELL
        Last Price  :  6.92      |      Upside/Downside  :  -0.52 (7.51%)
 


The prolonged trade tension continued to take a toll on Petronas Chemical (PCHEM) results which was broadly dragged by weak product prices (ASP). 3Q19 core profit fell to a level not seen since 2Q15. While share price fell by 5% yesterday after the poor results, we believe there could be further downside risks yet to be priced in from potential start up losses in Pengerang RAPID plant. Our 2020E EPS forecast is 20% below street. As such, we downgrade the stock to SELL from Hold with lower target price of RM6.40.

3Q19 Results Missed Expectation

3Q19 was widely expected to be a weak quarter due to heavy plant turnaround, which saw overall plant utilisation rate fall to 81%. However, the sharper-than-expected drop in 3Q19 profit (-56% yoy, -50% qoq) signals that PCHEM continues to suffer from a weaker ASP. While plant utilisation is projected to normalize in 4Q19, 9M19 results still missed our and consensus expectations, accounting for 71% and 69% of both estimates respectively primarily due to declining ASP trend

All Time Low EBITDA Margin for O&D Segment

 Olefins & Derivatives (O&D) revenue and EBITDA fell 28% and 57% yoy on the back of weaker plant utilisation (78% vs 96%). EBITDA margin was at its all time low at 18.2% with cracker maintenance, decline in sales volume and ASP.

 F&M was slightly affected with revenue and EBITDA declined by 18% and 21% yoy. Plant utilisation was higher at 83% (3Q18: 69%) on lower statutory turnaround. As a result, production and sales volume were higher, but continue to be impacted by weaker ASP and demand.

Downgrade to Sell

With a lackluster near-term outlook, we cut our FY19-21E earnings by 8%- 18% as we believe PCHEM will continue to face weak petrochemical ASP. We expect the new RAPID plant to contribute ~5% in overall FY20 EBITDA growth but see risks of potential losses at the bottomline. We downgrade the stock to Sell with lower 12-month TP of RM6.40 (from RM7.81), pegged to an unchanged 16x FY20 PER. The current stock valuation at 18.5x is still above historical average of 16x. Upside risks include a sharp downward movement in product ASPs and global demand.

Source: Affin Hwang Research - 14 Nov 2019

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