Losses at the JV level arose from its Aromatics JV with BASF which saw prolonged TA resulting in lost productivity. There were 6 plant TAs in 3Q19 and none planned for 4Q19. PIC is undergoing performance test runs from 4Q19- 2Q20 with commercial production set for 2H20. Maintain HOLD rating and TP of RM6.99 pegged to 7.5x FY20 EV/EBITDA.

We Joined PCHEM’s 3Q19 Analyst Con-call; the Following Are Some of the Key Takeaways.

Recap. Core earnings declined by 36% YoY in 9M19 to RM2.48bn (from RM3.89bn) on weakness in both operating segments. For its O&D division, weaker ASPs and lower sales volume as a consequence of higher plant turnaround activities (TA) resulted in a decrease in utilisation rates (91% vs. 95% in 9M18). This resulted in EBITDA declining by 56% whilst corresponding margins plummeted by 9ppts (from 33% vs. SPLY). For their F&D segment, despite recording higher utilisation rates at 94% vs. 89%, EBITDA declined by 32% YoY on softer ASP’s and lower offtake.

JV’s to see better days. The JV line recorded a cumulative loss of -RM59.0m in 9M19 vs. RM66.0m SPLY. This is mainly attributed to a longer than protracted downtime at BPC (60:40 JV with BASF) in Kuantan, which resulted in lost productivity. Management aspires for the Aroma plant to return to the black by 4Q if everything goes as planned.

Plant turnarounds. In total there were 6 plant turnaround activities (TA) undertaken in 3Q19. All of which were completed between 43-41 days which was deemed ahead of schedule - PCHEM usually plans for 30-60 days depending on the size of plant and scope of works. These were namely the Kerteh based olefins, glycols, derivatives, LDPE and ammonia plants and Sabah based fertilizer plant. There is no planned plant TA scheduled for 4Q19. Management guided that 2020-2021 will see very lean TA periods given that 2017-2019 saw the bulk of the heavy activities. All maintenance costs related to the TA in 3Q19 was recognised in the said quarter.

PIC-Petchem: PIC has achieved a completion rate of 99.4% as at September and is undergoing commissioning in stages. We understand that the refinery is “changing diet” to alternative feedstocks (sweeter crudes) due to the fire accident. In terms of margin impact, management expects it to be negligible as they have a plethora of “choices”. In terms of depreciation impact in FY20, management guided that it will be recognised on a plant by plant basis (componentized depreciation method) as and when each respective plants starts commercial operations. Thus, we can expect minimal impact to depreciation as PCHEM is undertaking performance test runs from 4Q19-2Q20. At best commercial production will begin in 2H20 with average plant utilisation of c.60%-70% targeted (on a full year basis).

Outlook. We continue to expect overall existing plant utilisation to hit c.90% for FY19. Production volumes improved by +2% YoY to 7.88m MTPA as at 9M19 and management is confident of hitting their earlier guided 10.00m MTPA target in FY19. Despite this, we continue to expect ASP’s to remain soft due to weak demand arising from the prolonged trade war, which continue to impact global economic growth.

Forecast. Unchanged.

Maintain HOLD: We maintain our HOLD rating and TP of RM6.99 based on a multiple of 7.5x FY20 EV/EBITDA. We believe valuations fairly reflect the ongoing concerns of the trade war on demand for petrochemical products. A re-rating catalyst would depend on (i) upside swing to oil prices, resulting in improved prices for olefins and derivatives and (ii) conclusion of external protectionist antics.

Source: Hong Leong Investment Bank Research - 15 Nov 2019