• Maintain Sell (TP: RM6.10). Petronas Chemicals (PChem) 9M23 core PATAMI of RM1.3bn (-76% YoY) were below both our and consensus forecast at 59% and 50% respectively. 3Q23 core earnings fell 33% hampered by higher effective tax rate (ETR) and lower plant utilisation (PU) rate of 77%. Following disappointing result, we cut our FY23F earnings forecast by 21%. We expect challenging market condition to persist given headwinds in end-market demand and tensed competition from Chinese producers. The stock is trading at 20x FY24F P/E which is above long-term average of 17x P/E. Hence, maintain a SELL recommendation on PChem with a lower DCFderived TP of RM6.10 (from RM6.20).

• Key highlights. 3Q23 core earnings declined 33% QoQ to RM301mn mainly due to higher effective tax rate. The core earnings was arrived after stripping out unrealised forex gain of RM112mn. Revenue declined 4.6% QoQ to RM6.8bn due to lower sales volume of 2,307k MT (2Q23: 2,421k MT). PU also declined to 77% (2Q23: 82%) due to higher maintenance activities. The pre-operating cost for Pengerang Integrated Complex (PIC) has halved to RM35mn from RM70mn in 2Q23 aided by forex gain. The company expect to achieve commercial operation date (COD) for PIC in 1Q24.

• Earnings forecast. We trimmed our FY23F earnings forecast by 21% to RM1.8bn as we reduce our margin assumption and increase effective tax rate.

• Outlook. The company announced that it will construct a new advanced chemical recycling plant at an estimated cost of USD150mn. The plant will be able to convert plastic waste into pyrolysis oil which is a feedstock for sustainable plastic. It is expected to commence operation in 1H26. Nonetheless, we remain cautious on PChem’s near-term earnings outlook given (i) soft demand from end-market, and (ii) higher competition from Chinese producers.

Source: BIMB Securities Research - 29 Nov 2023