3Q20 core net profit of RM556m (+201% QoQ, +1% YoY) and 9M20 core profit of RM1234m (-50% YoY) came in within expectations despite the latter constituting only 65% of our FY20 forecast. The commendable 3Q20 result was attributable to stronger contributions from both O&D and F&M segments as a result of stronger ASPs amidst the recovery in oil prices and economic activity. We expect its 4QFY20 results to be the strongest for the year as general product ASP is still on an uptrend. YTD average polyethylene prices are currently up 21% (from -15% in early May 2020) and YTD methanol prices are currently up 8% (from -31% in early June 2020). We believe that the prospects of PCHEM are improving sequentially and we expect the strong performance trend to continue into FY21. Hence, we have upgraded our TP to RM7.45 based on 10.5x FY21f EV/EBITDA (from 9x previously) as we believe that a higher multiple is justified based on the improving outlook in the petrochemical space and it represents a 50% discount to PTTGC’s EV/EBITDA of c.20.8x. We leave our earnings assumption unchanged as the results were inline.

Results within expectations. 3Q20 core net profit of RM556m (+201% QoQ, +1% YoY) and 9M20 core profit of RM1234m (-50% YoY) came in within our expectations but above consensus accounting for 65%/77% of our/consensus full year estimates as 4Q20 is expected to be an even stronger quarter than 3Q20. We expect 4Q20 core net profit to amount to at least RM650m due to the stronger product price trend. No dividends were declared in 3Q20, none declared SPLY as expected. 3Q20 core profit was derived after adjusting for net unrealised forex losses amounting to RM85m.

QoQ. Core earnings increased by 201% mainly due to improvements in overall ASPs across the O&D and F&M segments. Segment PAT for the O&D segment was up 732% while F&M was up 63%. The strong growth in QoQ profits were partially offset by lower plant utilisation of 90% (vs 100% in 2Q20) due to the disruptions in its methanol facilities in Labuan and urea facilities in Sabah from landslides, which halted production for c.22 days.

YoY. Core earnings were flat YoY as the impact of higher polyethylene prices and higher plant utilisation rate of 90% (vs 81% in 3Q19) were offset by lower urea, methanol prices.

YTD. 9M20 revenue and profit were down 13% and 50% respectively primarily due to lower YTD ASPs from Covid-19, partially mitigated by higher average YTD group utilisation of 95% (+3% from FY19).

Outlook. We expect overall plant utilisation to end the year at c.96% as no plant turnaround activity is expected in 4Q20 while 5 plant turnaround activities are expected to be carried out in FY21. Nevertheless, we are confident that PCHEM would still be able to keep its average plant utilisation rates above 90% despite the scheduling of heavier plant turnaround activities. We also expect the increasing price trend to continue into FY21 due to (i) tighter supply dynamics as a result of major plant shutdowns from lower oil prices and Covid-19, (ii) improving demand dynamics from countries becoming more accustomed to the new normal and (iii) strong China demand of petrochemical products from its successful handling of the Covid-19 pandemic. We also believe that petrochemical prices will see further improvements if an effective vaccine can be approved for distribution by the end of FY21.

Cessation of BDO. PCHEM has also announced that it is going to shut down its Butanediol (BDO) plant as it has been consistently incurring monthly losses of c.RM5m. PCHEM is expected to incur a one-off cost of USD139m (RM577m). The estimated financial cost to PCHEM is USD56m (RM232m) apportioned over 2 years.

PRefChem. The PRefChem (Pengerang) plant is only expected to commence operations in 1Q21. Partial depreciation is only expected to kick in beginning from May and the full depreciation of the PRefChem plant is only expected to happen in 2H21. We maintain our view of PRefChem contributing negatively to PCHEM’s profits next year as the plant would require some time to ramp up on its production levels.

Forecast. We maintain our forecast for FY20-22 as 9M20 results was within our expectations despite constituting only 65% of our forecast as the positive product price trend is expected to continue.

Maintain BUY with higher TP of RM7.45. We have upgraded our TP to RM7.45 (from RM6.50 previously) based on 10.5x FY21f EV/EBITDA (from 9x previously) as we believe that a higher multiple is justified based on the improving demand and supply dynamics in the petrochemical space and it represents a 50% discount to PTTGC’s EV/EBITDA of c.20.8x. We do not expect global petrochemical plants that have been previously deferred/cancelled to re-emerge in the near future as the global petrochemical market is still in a state of oversupply. We believe that the underlying uncertainty in the petrochemical space would still deter future petrochemical plant capacity additions that is not close to FID despite improving fundamentals.

Source: Hong Leong Investment Bank Research - 19 Nov 2020