Investment Highlights

• We maintain HOLD on Petronas Chemicals Group (PChem) with a lower fair value of RM6.85/share (from RM7.45/share previously), pegged to FY24F EV/EBITDA of 8.5x (broadly on par to its 2-year EV/EBITDA average). This also incorporates a 3% premium for our unchanged 4-star ESG rating (Exhibit 12).

• The lower FV is to account for lower product spreads from softer product prices and high operating costs. We cut PChem’s FY23F earnings by 21% to account for lower plant utilisation rate and a mixed petrochemical price outlook for the remainder of the year. However, we fine-tuned FY24F net profit while raising FY25F earnings by 10% assuming a moderate recovery in product prices and broadly stable plant utilisation rates at 85%-95%.

• PChem’s 9MFY23 core net profit (CNP) of RM1.4bil (after stripping out net gains on foreign exchange and inventory write-back), was below expectations, accounting for 57% of our earlier FY23F earnings and 55% of street’s. As a comparison, 9M22 accounted for 89% of FY22 core net profit. The group did not declare an interim dividend as expected.

• YoY, 9MFY23 revenue rose by 6% to RM21.5bil supported by stronger sales from the Pengerang plant in Johor and the inclusion of Perstop into the Specialties segment. Corresponding to this, YTD plant utilisation rate remained largely similar at 85% with production volume rising by 8% to 7.8mil metric tonne (mt). 9MFY23 CNP plunged by 75% YoY due to lower EBITDA margins of 15% (vs. 31% in 9MFY22) (Exhibit 2) from weaker product spreads, particularly for ethane, ammonia/urea-related products, higher energy/utilities costs and increased depreciation charge.

• QoQ, 3QFY23 revenue declined by 4.6% primarily due to a mix of lower sales volume from weaker production as plant utilisation rate declined sequentially to 77% (from 82% in 2QFY23) following planned plant turnarounds at: (i) the ammonia plant in Kerteh, Terengganu, which has a capacity of 450k metric tonne per annum (mtpa); (ii) ammonia and urea plant in Bintulu, Sabah with a combined capacity of 1.2mil mtpa; and (iii) unscheduled shutdown at the Methanol 2 plant in Labuan with a capacity of 1.7mil mtpa, as well as the methyl-tert-butyl ether (MTBE) and propane dehydrogenation (PDH) plants in Gebeng, Pahang.

• Similarly, 3QFY23 CNP declined by a wider 33% from a mix of lower contributions from the O&D segment, a continually flattish group EBITDA margin of 14.7% broadly dragged by lower product spreads and a rise in maintenance costs and tax expense.

• Salient highlights from the analyst briefing:
  • The group reported positive development in product prices in 3QFY23 due to the strengthening of crude oil prices and increase in restocking activities. Moving forward, management expects to see a seasonal slowdown, particularly for the O&D segment. Notably, average product prices for the segment had declined by 4% in recent weeks on weaker demand from the downstream segment with clients managing term commitments and a stronger supply environment from China due to newly-added capacity.
  • Meanwhile, management reports that average prices for the Fertiliser & Methanol (F&M) segment have seen an improvement particularly due to limited spot supply and China’s export ban which will strengthen demand in anticipation of the winter season.
  • Management continues to see no major improvements for the Specialties market, as ongoing macroeconomic uncertainties, especially in the key end-markets of US, Europe and China have resulted in slower industrial activities and cautious consumer sentiments. Nevertheless, the group intends to continue with the commissioning of its Pentaerythritol plant in Sayakha, India in 1HFY24 and has already begun the prequalification process with prospective clients.
  • Full-year FY23F group plant utilisation rate is expected to register at >85%, supported by less planned plant turnaround activities in 4QFY23. We believe this would result in sequentially better sales volume, partly shielding earnings from further deterioration of petrochemical prices amid depressed crude oil prices.
  • Commissioning losses stemming from issues related to the upstream refinery and naphtha cracker for the Pengerang petrochemicals plant narrowed further in 3QFY23 to RM35mil, bringing YTD losses to RM200mil. The plant is expected to undergo 5 performance test runs (3 poly-propylene, 1 isononanol & 1 glycols) by 1QFY24.
  • Management guides for a higher effective tax rate assumption of 10%-15% moving forward on the back of weaker product spreads which implies lower tax deductibles from operations in Labuan due to the Global Incentive for Trading (GIFT) programme. This is in line with our current effective tax assumptions. 
  • The advanced pyrolysis chemical plant project, in conjunction with Plastic Energy, is expected to incur an estimated capex of US$150mil with a capacity of 22k mtpa. The plant is expected to be completed by 1QFY26.
• We expect near-term earnings weakness to persist from sluggish petrochemical prices, notwithstanding our expectation of a recovery in plant utilisation rates to levels >85% in 4QFY23 given the absence of plant turnarounds and heavy maintenance.

• On a positive note, the incremental contributions from Perstorp coupled with the gradual start-up of Pengerang Integrated Complex (PIC) would also partially cushion subdued petrochemical product prices currently.

• PChem appears unattractive at a current FY24F EV/EBITDA of 8.8x, an 11% premium to its 2-year EV/EBITDA average of 8.3x and offers an unassuming dividend yield of 3.3%.

Source: AmInvest Research - 29 Nov 2023