• FY23 core net profit of RM1,582m was 28% short of our forecast, as 4Q23 suffered a RM2m core net loss vs. our RM600m core profit forecast.

• We reiterate Hold as plant utilisation may recover this year if the surprises of last year do not repeat, and this could offset Pengerang losses in 2H24F.

• Our end-CY24F target price is raised slightly to RM7.33 as we recalibrate the balance sheet, still based on P/BV of 1.4x, 2 s.d. below the mean since 2011.

A surprise core net loss in 4Q23…

PCG’s 4Q23 core net loss of RM2m (vs. 3Q23’s RM424m core net profit) was primarily due to the drop in O&D utilisation to 71%, from 79% in 3Q23, due to longer-than-expected plant turnaround at the Gebeng MTBE plant, unplanned outage at the Kertih aromatics plant, and steam supply disruptions to the second ethane cracker at Kertih. The production disruptions caused a RM50m qoq increase in plant maintenance expense, and also forced PCG to purchase finished product from its competitors (aka ‘strategic sourcing’) in order to on-sell to its own customers so as to fulfil contractual commitments. The latter had the impact of compressing PGC’s profit margins. As a result, the O&D division fell into an EBITDA loss in 4Q23, from a profit in 3Q23. The unfavourable swing in core earnings was exacerbated by a RM227m unfavourable forex swing to net translation loss of RM115m in 4Q23, vs. a net gain of RM112m in 3Q23. The F&M division, on the other hand, saw higher 4Q23 EBITDA of RM770m, vs. RM601m in 3Q23, as utilisation improved to 91% (from 76%) when the unplanned shutdown at the Labuan methanol plant #2 was resolved.

…but the outlook could improve if Pengerang losses manageable

PCG’s share price fell at the start of the afternoon trading session yesterday after PCG released its weak results at lunchtime, but recovered to close slightly higher than last week’s closing price. We think that PCG’s shares are finding support because they are already trading at trough P/BV valuations at 2 s.d. below the mean since 2011. Looking forward to 1Q24F and to 2024F as a whole, we keep our fingers crossed that the disruptions faced by PCG in 2023 will not recur, or at least will not be worse. PCG guided for group-wide plant utilisation rate of more than 90% in 2024F, vs. 85% in 2023, even with five plant turnarounds scheduled for this year. Gross profit margins will also likely improve in 2024F with higher plant utilisation rates, due to better recovery of fixed costs, lower maintenance costs, and also because PCG will no longer need to engage significantly in ‘strategic sourcing’. We also note that selling prices of PE polymers, MEG and methanol have all increased qoq so far in 1Q24F, which could help PCG deliver better results this quarter compared to 2H23. The key downside risk is the potential for larger-than-expected EBITDA losses from PPCSB once the Pengerang complex is commercially operational sometime during 2Q24F, which is in addition to the expensing of depreciation and interest expense at PPCSB. On the other hand, PPCSB could deliver an upside surprise if the price discounts on feedstock purchased from PRCSB are good enough to compensate for the weak PE and PP selling price spreads against ethylene and propylene.

Source: CGS-CIMB Research - 27 Feb 2024