FY20 core profit of RM1,945m (-31% YoY) came in within our expectations (102%) but above consensus (119%). We believe the prospects of PCHEM are improving sequentially and we expect the strong performance trend to continue into FY21 , with 1QTD21 product prices already averaging higher than 4Q20. Hence, we upgrade our call from Hold to BUY with a TP of RM8.40 based on 11.5x FY21f EV/EBITDA (from 10.5x previously), leaving our earnings assumptions unchanged. We believe that a higher multiple is justified based on the improving outlook in the petrochemical space and it still represents a steep discount to PTTGC’s EV/EBITDA of c.18.3x.

Within expectations. 4Q20 core net profit of RM698m (+26% QoQ, +105% YoY) and 12M20 core profit of RM1945m (-31% YoY) came in within our expectations (102%) but above consensus (119%) full year estimates. Plant utilisation stood at 94% (+5% YoY) in 4Q20 and 94% (+2% YoY) in 12M20 despite heavy plant turnaround activities. 12M20 core profit was derived after adjusting for RM317m in exceptional items, mainly comprising of the one-off cost from the cessation of its BDO plant.

Dividend. 7 sen/share of dividends were declared in 4Q20 (SPLY: 7sen) as expected, bringing 12M20 dividends to 12 sen/share (SPLY: 18sen).

QoQ. Core earnings increased by 26% mainly due to higher ASP and volumes.

YoY. Core earnings were up 105% due to higher ASP and volumes, mitigating its impairment cost on its BDO plant.

YTD. Core earnings were down 31% from its weak performance in 1H20 stemming from lower ASP as a result of lower crude oil prices from the Covid-19 pandemic.

Outlook. We expect better prospects for PCHEM as a result of higher crude oil and product prices. We also expect the increasing price trend to continue into FY21 due to (i) tighter supply dynamics as a result of major plant shutdowns in the US Gulf coast area from the freezing temperatures in Texas (85% of MEG capacity in US has been affected according to ICIS), (ii) improving demand dynamics for plastics due to increased demand from food packaging, (iii) strong China demand of petrochemical products from its economic recovery, (iv) stronger fertiliser prices from higher coal prices in China as most marginal producers of urea/nitrogen fertilisers mostly use coal as an input, (v) shortage of urea in India as stock levels remain low and (vi) further improvements in demand from the timeline and efficacy of vaccines. We also believe that increased economic activity globally should be able to offset the full resumption of production capacity in the US after the cold winter in Texas subsides. PCHEM is expected to carry out 3 heavy plant turnaround and maintenance activities in FY21 but the Company should be able to keep its utilisation rate above 90%. Nevertheless, we expect its PReFChem plant to only contribute positively to its profits in FY22.

Forecast. No changes as 12M20 results were within our expectations.

Upgrade to BUY, TP: RM8.40. We have upgraded our call from HOLD to BUY with a TP of RM8.40 (from RM7.45 previously) based on 11.5x FY21f EV/EBITDA (from 10.5x previously) as we believe that a higher multiple is justified based on the improving demand and supply dynamics in the petrochemical space. Our EV/EBITDA assumption represents a 37% discount to PTTGC’s EV/EBITDA of c.18.3x. We believe that better crude oil prices are expected to keep petrochemical product ASP afloat and the shutdowns in petrochemical capacities in Texas would serve as a short-term impetus for product prices as it might be an onerous task for petrochem players to fully resume its production after the cold weather subsides. 1QTD21 product prices are already higher than 4Q20 at this juncture.

Source: Hong Leong Investment Bank Research - 24 Feb 2021