• PCG will release 3Q23F results on 28 Nov; we think there is risk of core net profit coming in below expectations due to Pengerang commissioning losses.

• The unscheduled outage at Methanol Plant #2 for one month in 3Q23F and lower qoq PE, MEG and methanol prices may also depress earnings.

• Reiterate Reduce with unchanged end-CY24F TP of RM6.85, based on a target P/BV of 1.33x, -2 s.d. from mean given the weak medium-term outlook.

Weaker Qoq PE, MEG and Methanol Prices in 3Q23F

PCG delivered three consecutive quarters of weakish core net profits between 4Q22 and 2Q23, as a result of the downturn in petrochemical selling prices. Selling prices had peaked in 2Q22 in the immediate aftermath of the Russia-Ukraine war, but subsequently fell due to weak consumer demand, excess supplies, and declines in naphtha feedstock costs, before selling prices finally found their bottom in mid-2023. While selling prices have since recovered from mid-2023 as a result of higher naphtha feedstock costs (due to the recovery in crude oil prices), the average PE, MEG and methanol prices in 3Q23 were still lower than in the immediately preceding 2Q23. In our view, this could be the main reason why PCG’s 3Q23F core net profit may end up lower than in 2Q23, in our view. While urea prices averaged higher qoq, we think the uptick is unlikely to be sufficient to compensate.

Pengerang Commissioning Losses, Unplanned F&M Plant Shutdown

Wider Pengerang commissioning losses could be the second reason for poor 3Q23F results, in our view; commissioning losses of RM100m in 1Q23 narrowed to RM70m in 2Q23, but may widen in 3Q23F and 4Q23F as PCG was reported by consultancy Chemical Market Analytics (CMA) to be alternating between starting up and shutting down, which is likely to be very costly, because the upstream refinery and naphtha cracker were still not yet stabilised. Not helping PCG’s 3Q23F results was the unplanned shutdown of Labuan Methanol Plant #2 for one month in 3Q23 due to mechanical problems. The F&M division saw its average utilisation fall from 1Q23’s 97% to 2Q23’s 73% due to methane gas supply issues caused by pipeline maintenance, but any recovery in the plant utilisation rate may have to wait until 4Q23F. Finally, given the weak European economy, we think that the ongoing specialty chemical losses will likely continue into 3Q23F.

4Q23F May Not be as Strong as Hoped

For Oct 2023, average PE, methanol and urea prices averaged higher than during 3Q23. But demand weakness and ample supply, as well as the moderating crude oil price, caused PE and urea prices to drop last Friday wow. This is the first wow drop since mid-2023, and may mark the reversal of the short-lived and weak price uptrend since mid-2023. Potential derating catalysts: 1) if prices continue to weaken, PCG’s 4Q23F performance may not be significantly better qoq, and this could puncture the hopes of investors; 2) we expect cash losses after the commercial start-up of Pengerang sometime during FY24F. Upside risks include supplier production curbs that could help improve the demand -supply balance.

Source: CGS-CIMB Research - 2 Nov 2023