Petronas Chemicals (PChem) 2Q23 core profits fell 26% QoQ to RM446mn hampered by lower sales volume and ASP in F&M segment as well as weak margin in specialty segment. This was below both our and consensus expectation, making up only 35% and 30% respectively. Following disappointing result, we cut our FY23F/FY24F/FY25F earnings forecast by 23%/22%/11%. The stock price has somewhat recovered in tandem with higher oil price. However, we foresee near term outlook to remain challenging given headwinds in end-market demand and tensed competition from Chinese producers. Hence, we think recent rise in PChem stock price is not sustainable and therefore downgrade the company to a SELL with a lower DCF-derived TP of RM6.20.

• Below expectation. 1H23 core earnings of RM1bn was below both our and consensus’ estimate at 35% and 30% respectively.

• Dividend. The company declared a DPS of 8sen which was markedly lower than 1H22 DPS of 25sen. This implies payout ratio of 61% (1H22: 51%).

• QoQ. Headline PATAMI rose 18% to RM628mn mainly due to forex gain from revaluation of Pengerang Integrated Complex (PIC) loan amounted to RM146mn and inventories write-back of RM32mn. Excluding these items, core earnings fell by 26% to RM446mn. This was driven by weaker Fertiliser and Methanol (F&M) segment which was affected by (i) gas supply issue that reduced the segment utilisation rate to 82% from 96% in 1Q23, and (ii) lower ASP. However, the pre-operating cost for PIC has reduced to RM70mn from RM100mn in 1Q23 mainly due to higher sales volume.

• YTD. Revenue grew 11% to RM14.7bn mainly due to consolidation of newly acquired Perstorp in 4Q23. However, profit slumped 73% due to shrinking margin in F&M segment due to lower urea prices whereas specialty segment was affected by higher energy price in Europe and more competing supply from China.

• Change in earnings forecast. We further trimmed our FY23F/FY24F/FY25F earnings forecast by 23%/22%/11% (Table 4) mainly to account for weak performance in specialty segment against our initial estimate.

• Outlook. We remain cautious on Pchem’s near-term earnings outlook given (i) challenging demand outlook from end-market, and (ii) higher competition from Chinese producers.

• Our call. We downgrade PChem to SELL with a lower DCF-derived TP of RM6.20 (from RM6.90) following our earnings revision. This implies 20x FY24F P/E which is at +0.5 SD above the long-term mean of 17x P/E (Chart 1).

Source: BIMB Securities Research - 23 Aug 2023