• Upgrade to HOLD (TP: RM6.00). Petronas Chemicals (PChem) 1H24 core PATAMI of RM863mn were below both our and consensus’ estimate at 40% and 36% respectively. 2Q24 core earnings were weaker partly due to larger losses at Pengerang Integrated Complex (PIC) of RM100mn (1Q24 loss: RM10mn). Nonetheless, the company announced higher interim DPS of 10sen (1H23: 8sen). We trim our FY24-26F earnings forecast by 7-11% as we revisit our earnings assumption for PIC. Following weakness in share price, we upgrade PChem to a HOLD (from a SELL) with similar DCF-derived TP of RM6.00. We think the risk-to-reward is quite balanced as the stock is trading at 18x FY25F P/E which is only slightly above long-term average of 17x P/E.

• Key highlights. Headline PATAMI rose 16.3% QoQ and 23.7% YoY to RM777mn mainly boosted by one-off gains from adjustment of timing for payment of trade receivables (i.e. utilities cost at Pengerang) amounted to RM353mn. Excluding this, core earnings declined 20.2% QoQ and 14.1% YoY to RM383mn. This was due to higher opex at PIC as it start to expense off fixed manufacturing cost (instead of capitalising it following the successful performance test run (PTR) of 5 plants at PIC). The company will undertake PTR at 2 remaining plants (i.e. isononanol and ethylene glycol) soon. Upon successful PTR of these 2 plants, PIC will achieve its commercial operation date (COD) status.

• Earnings forecast. We cut our FY24F/FY25F/26F earnings by 10.6%/7.3%/6.8% as we tweaked higher PIC’s annual depreciation and finance cost charges to RM400mn and RM200mn respectively.

• Outlook. The COD of PIC could drag its earnings in 2H24. However, this may be partially offset by new revenue streams from commencement of several new plants 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 - 19 Aug 2024