• 9M23 core net profit of RM1.6bn was below expectations at just 60% of our previous FY23F forecast, due to unplanned outages at Kertih and Labuan.

• PCG’s earnings likely troughed in 3Q23; while market dynamics could stay weak for the next half year, we expect 4Q23F earnings to improve qoq.

• Upgrade from Reduce to Hold with a higher end-CY24F TP of RM7.15 (P/BV of 1.4x, -2 s.d. from mean since 2011).

PCG Reported Its Lowest Quarterly Profit in More Than Three Years

3Q23 core net profit of RM424m was the lowest in more than three years, and was 33% lower qoq, due to unscheduled outages at Kertih and Labuan. The second olefins plant at Kertih was down for about one month due to a scheduled turnaround and sudden problems with utilities and power supplied by its sister company that dragged into Oct 2023. This caused the 3Q23 O&D PAT to halve, as production and sales fell qoq, and maintenance costs rose. On the F&M side, the Labuan Methanol Plant #2 was affected by a sudden one-month mechanical failure in Sep 2023, after emerging from a one-month outage in 2Q23 due to methane gas feedstock supply issues. However, the 3Q23 F&M PAT still increased 50% qoq (from a low base), as the Sabah urea plant was fully operational in 3Q23 after it encountered feedstock supply issues for one month in 2Q23. Apart from various outages, PCG’s 3Q23 profit was also impacted by lower average selling prices (ASP) for O&D and Specialties; higher qoq ASPs for the F&M division were too weak to make a difference. Meanwhile, PCG’s effective tax rate surged to 25% in 3Q23, from 9% in 2Q23, as the one-off ‘earn-out’ payment in 2Q23 related to the 2019 acquisition of BRB was treated as a non-deductible expense.

We Expect Sequential Profit Recovery in 4Q23F and Beyond

Looking forward to 4Q23F, we expect PCG to perform better sequentially, as the unplanned outages at the F&M division were fully resolved in 3Q23, and the outage at O&D was also fully resolved by late-Oct or early-Nov. ASPs for LDPE, methanol and urea have so far averaged higher in 4Q23F vs. 3Q23, while ASPs for HDPE and MEG have held steady. ASPs for Perstorp also increased qoq in 4Q23F, due to reduced competition from China, according to PCG. These are the main reasons for our upgrade to Hold, given that PCG has already derated 22% over the past 12 months and is already trading at a trough P/BV multiple of 1.4x (-2 s.d. from the mean since 2011) based on the 3Q23 BVPS of RM4.97/share. We have no doubt that PCG will continue to be subject to oversupply on the commodity and specialty chemicals businesses, but PCG’s earnings may not fall further on company-specific factors. Upside risks include a broad-based economic stabilisation or recovery that could help stabilise then lift ASPs sometime after mid-2024F. The key downside risk is the potential for larger-than-expected EBITDA losses from PPCSB once the Pengerang complex is commercially operational sometime during 1Q24F; we have already reflected our estimate of PPCSB losses into our financial model, but there is the potential for the actual losses to exceed what we have pencilled in.

Source: CGS-CIMB Research - 28 Nov 2023