Petronas Chemicals (PChem) 1Q23 core profits plunged by 47% QoQ and 71% YoY to RM0.6bn hampered by the normalisation in urea prices. This was below both our and consensus expectation, making up only 10% and 11% respectively. Following disappointing result, we cut our FY23F/FY24F/FY25F earnings forecast by 51%/43%/15% and lower down our TP to RM6.90 from RM8.30. However, our HOLD call on the stock is maintained.

• Below expectation. 1Q23 core earnings of RM604mn was below both our and consensus’ estimate at 10% and 11% of full year estimates respectively.

• Dividend. No dividend was declared as expected.

• QoQ. Headline PATAMI rose 10.6% to RM532mn mainly due to absence of one-off expenses that include (i) forex loss of RM412mn and (ii) one-off earn-out payment of RM177mn relating to acquisition of BRB International. Excluding these items, core earnings fell by 47% which was driven by lower income from Fertiliser and Methanol (F&M) segment.

• YoY. Revenue rose by 14% mainly due to (i) consolidation of newly acquired Perstorp in 4Q23 and (ii) higher sales volume in olefin and derivatives (O&D) segment on the back of higher plant utilisation rate of 94% (1Q22: 75%). However, these were offset by (i) lower urea prices in the F&M segment, (ii) lower product spread in O&D segment, and (iii) pre-operating cost Pengerang Integrated Complex (PIC) of RM100mn.

• Change in earnings forecast. We trimmed our FY23F/FY24F/FY25F earnings forecast by 51%/43%/15% (Table 4) as we make multiple revisions to our assumptions as the following: (i) lower product spread margin and (iia) higher operating cost to account for pre-operating cost of PIC in FY24.

• Outlook. Earnings will continue to be challenging against the backdrop of weak global demand. While there is some pick-up in volume following the re-opening of China economy, the recovery in ASP remains sluggish. Its European unit (i.e., Perstorp) was affected by higher energy and raw materials costs in 1Q23 but this will recover gradually from 2Q23 as commodity prices are trending lower.

• Our call. We maintain PChem as a HOLD with a lower TP of RM6.90 (from RM8.30) following our earnings revision.

Source: BIMB Securities Research - 30 May 2023