KUALA LUMPUR (Aug 19): Petronas Chemicals Group Bhd or PetChem (KL:PCHEM) is projected to face weaker earnings in the second half ending Dec 31, 2024 (2HFY2024), driven by lower average selling prices (ASPs) in the olefins and derivatives segment, as regional shutdowns end and supply increases, according to analysts.

CIMB Research in a note on Monday said the fertilisers and methanol segment is also expected to face headwinds, as China is expected to lift its export restrictions on urea.

"The declining price of ammonia will reduce production costs, further pressuring urea prices.

"Moreover, a series of planned plant turnarounds, including PC Ethylene and Polyethylene in Kertih in the third quarter ending Sept 30, 2024 (3QFY2024) and Asean Bintulu Fertilizer in 4QFY2024, are likely to result in lower utilisation, production and sales volumes," the house said.

CIMB noted that the company’s 2QFY2024 core earnings were affected by larger-than-expected losses at the Pengerang Integrated Complex (PIC), amounting to RM100 million, compared with a RM10 million loss in 1QFY2024.

It said the PIC's operational costs were higher than forecast, resulting in 1% year-on-year (y-o-y) and 8% quarter-on-quarter declines in 2QFY2024 core net profit to RM445 million.

“This brought 1HFY2024 core net profit to RM925 million (-17.9% y-o-y), which make up 46% and 38% of our and consensus expectations respectively.

“The key variance against our forecast was due to higher-than-expected operating costs at the PIC,” the house added.

Consequently, CIMB revised its FY2024-26 earnings projections downward by 5.2% to 9.6%, and cut its sum-of-parts-based target price (TP) by 7.3% to RM6.04, while maintaining a ‘hold’ call on PetChem.

BIMB Securities in a separate note said the commercial operation date (COD) of the PIC could drag its earnings in 2HFY2024.

Notably, the PIC will achieve its COD following performance test runs at the two remaining plants (isononanol and ethylene glycol) soon.

"However, this may be partially offset by new revenue streams from the commencement of several new plants, including i) melamine in Gurun, Kedah; ii) 40,000 MTPA Pentaerythritol in Sayakha, India, beginning from 3QFY2024; and iii) 2-EHA under a joint-venture company in Gebeng," the house added.

However, following a drop in share price, BIMB upgraded PChem to a ‘hold’, with a TP of RM6, as the stock is seen trading slightly above its long-term average.

“We think the risk-to-reward ratio is quite balanced, as the stock is trading at 18 times FY2025 price-earnings (P/E), which is only slightly above the long-term average of 17 times P/E,” the house said.

Last Friday, the chemical giant reported that its net profit climbed 24% for 2QFY2024 from a year earlier, attributed to higher sales volume and finance income.

Net profit for the three months was RM777 million, compared with RM628 million for 2QFY2023.

PetChem said in an exchange filing that revenue for the quarter rose 8.6% y-o-y to RM7.73 billion, from RM7.11 billion. Despite the challenges, PetChem declared a higher interim dividend of 10 sen, up from eight sen for 1HFY2023.