• Maintain Sell (TP: RM6.00). Excluding gains from non-core items amounting to RM188mn, Petronas Chemicals (PChem) 1Q24 core PATAMI of RM480mn were inline with our estimate at 22% but came below consensus forecast at 18%. It declined 21% YoY mainly due to lower plant utilization rate (UR) of 87% (1Q23: 96%) on the back of plant turnaround at PC Fertiliser Kedah and unplanned shutdown at urea plant in Bintulu. There were signs of initial recovery in market demand particularly as clients begin restocking its inventories. However, at this juncture, we think the market is overly optimistic with the recovery. Hence, maintain a SELL recommendation on PChem with a lower DCF-derived TP of RM6.00 (from RM6.10). We advise investors to revisit at lower level as the stock is trading at 25x FY24F P/E which is above long-term average of 17x P/E.

• Key highlights. Core earnings improved QoQ mainly due to (i) lower maintenance cost at O&D segment, and (ii) stronger profit contribution from specialty segment which was boosted by higher sales volume. Sales volume stood at 2.37mn MTPA which is slightly lower than previous quarters (1Q23: 2.43mn MTPA, 4Q23: 2.45mn MTPA).

• Earnings forecast. No change.

• Outlook. The company targets to achieve commercial operation at Pengerang complex in 2H24 which would see it recognising higher annual depreciation charges of c.RM400mn. Given the complex is incurring net pre-operating cost of c.RM5mn in 1Q24, the higher expenses would pose downside risk to the earnings. Nonetheless, this may be offset by new revenue streams from commencement of several new plants in 2024 including (i) melamine in Gurun, Kedah, (ii) 40k MTPA Pentaerythritol in Sayakha, India, beginning 3Q24, and (iii) 2-EHA under JV company in Gebeng.

Source: BIMB Securities Research - 30 May 2024