• Maintain Sell (TP: RM6.10). Petronas Chemicals (PChem) FY23 core PATAMI of RM1.5bn (-78% YoY) were below both our and consensus forecast at 76% and 60% respectively. 4Q23 core earnings fell 52% QoQ and 87% YoY hampered by losses at olefin and derivatives (O&D) segment. The company announced 2nd interim DPS of 5sen (2H22: 16sen) bringing total DPS for FY23 to 13sen (FY22: 41sen) which implies dividend yield of 1.8%. We cut our FY24-26F earnings forecast by 10.3%/8.6%/8.1% mainly as we trim earnings contribution from JV companies. We expect challenging market condition to persist given headwinds in end-market demand and tensed competition from Chinese producers. Maintain a SELL recommendation on PChem with an unchanged DCF-derived TP of RM6.10 as the stock is trading at 20x FY24F P/E which is above long-term average of 17x P/E.

• Key highlights. 4Q23 core earnings declined 51% QoQ to RM146mn mainly due to losses at O&D segment which suffered from (i) production interruption from unplanned shutdown and gas feedstock supply, and (ii) higher repair and maintenance costs. Revenue, however, rose 6.3% QoQ to RM7.2bn due to higher PU at Fertiliser and Methanol (F&M) segment, boosting blended PU to 84% (3Q23: 77%).

• Earnings forecast. We trimmed our FY24F/FY25F/FY26F earnings forecast by 10.3%/8.6%/8.1% as we cut earnings contribution assumption from JV companies as well as increase minority interest charges to account for the disposal of 25% interest in Petronas Chemicals Fertiliser Sabah Sdn Bhd (PCFS) to the Sabah government which took effect in 2Q23.

• Outlook. Against the backdrop of weak product margin environment, the company will commission several new plants in 2024 including (i) melamine in Gurun, Kedah, (ii) Pentaerythritol in Sayakha, India, and (iii) 2-EHA under JV company in Gebeng.

Source: BIMB Securities Research - 27 Feb 2024