• We maintain our contrarian SELL recommendation on Petronas Chemicals with higher DCF-derived TP of RM9.00. We deem current risk-to-reward as not favorable as there are various reasons for us to believe that potential correction in commodities is looming.

• Granted, we raise our FY22F/FY23F/FY24F earnings forecast by 95%/53%/37% respectively as we impute higher ASP into our estimates. However, we advise investors to take any stock price rally as an opportunity to sell on strength.

• Risks to our call include (i) prolong supply disruption which we think is unlikely and (ii) successful earnings accretive acquisition.

Beneficiary of high oil and gas price

PChem is one of the beneficiaries of soaring commodities price which saw its earnings rose to record high of RM7.3bn in FY21. Its earnings was uplifted by elevated oil price which drives its O&D product price higher. Meanwhile, F&M segment was boosted by extreme fertiliser price amidst supply disruption due to escalated gas price and trade restriction.

Commodities remain vulnerable, in our view

Notwithstanding, we remain cautious with the extreme market condition as we foresee potential market correction is in the horizon. We view recent correction in European gas price as a precursor to normalising fertiliser supply condition. The expected increase in US LNG export to Europe should also sustain low gas price. On the other hand, we also think the security risk premium associated with oil price amidst the on-going Russia-Ukraine war to dissipate over time which could impact the O&D segment.

Change in earnings forecast

We raise our FY22F/FY23F/FY24F earnings forecast by 95%/53%/37% respectively as we impute higher ASP into our estimate. Our FY22F estimate is based on Brent forecast of USD85- 90/bbl before it drops further to USD70/bbl in FY23F.

Maintain SELL with higher TP RM9.00

Maintain SELL on PChem with higher DCF-derived TP of RM9.00 (from RM7.10) which implies 12x FY23F P/E. While the company may continue to record strong earnings in upcoming quarter, we reckon that this may not sustainable in the long run. Thus, we advise investors to take any stock price rally as an opportunity to sell.

Source: BIMB Securities Research - 20 Apr 2022