1Q21 core profit of RM1,392m (+99% QoQ, +175% YoY) came in above our (53%) and consensus’s (38%) expectations due to better than expected ASP for most of its products. We believe that the prices of most of its products will remain steady but we opine that polyethylene prices are expected to taper off in the coming months. Hence, we downgrade our call from Buy to HOLD with a higher TP of RM8.75 (from RM8.40) based on 8.0x FY21f EV/EBITDA (from 11.5x previously). PCHEM has already risen by almost 50% since our BUY call upgrade on the 29 Sept 2020. We believe that the upside for PCHEM is limited at this juncture but would warrant a re-rating if our inference on lower polyethylene prices does not materialise in the coming months.

Above expectations. 1Q21 core net profit of RM1392m (+99% QoQ, +175% YoY) came in above our/consensus’ constituting 53/38% of respective estimates due to stronger than expected polyethylene prices as O&D segment PAT has increased by 2890% QoQ. 1Q21 core profit was derived after adjusting for -RM69m in exceptional items, comprising of (i) -RM34m of inventory write-backs and (ii) -RM35m of amortisation of deferred income.

Dividend. None Declared, None SPLY

QoQ. Core earnings increased by 99% due to higher overall product prices, driven by (i) higher crude oil prices, (ii) strong demand for plastic products and (iii) shortage of petrochemical product supply due to the US storms and container shortage despite lower plant utilisation rate of 90% (from 94%), production volume and sales volume.

YoY. Core earnings were up 175% due to the same reasons mentioned above.

Outlook. We expect the steady price trend for PCHEM’s products to continue into FY22 due to (i) strong China, US and Europe demand of petrochemical products from its economic recovery, (iii) stronger fertiliser prices from higher coal prices in China as most marginal producers of urea/nitrogen fertilisers mostly use coal as an input, (iii) shortage of urea in India as stock levels remain low and (iv) further improvements in demand from the timeline and efficacy of vaccines. However, we foresee polyethylene prices tapering in the months to come as the US recovers from the storms and the cold winter in Texas and more polyethylene plant start-ups in Asia. The recovery of the US and UK from Covid-19 could also result in lower demand for high grade plastic-related healthcare products. 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 contribut e positively to its profits in FY22.

Forecast. We raise our FY21/22 forecast by 59/27% to account for the better than expected average selling prices for its key products.

Higher TP of RM8.75 but downgrade to HOLD. We have downgraded our call from a Buy to HOLD with a higher TP of RM8.75 (from RM8.40 previously) based on 8.0x FY21f EV/EBITDA (from 11.5x previously) as we believe that polyethylene prices would start to taper off in the months to come due to the (i) resumption of US production from the cold winter in the gulf coast, (ii) impending polyethylene plant start-ups in Asia and (iii) the recovery of container shortage from the blockage of the Suez Canal despite its stellar results. Our EV/EBITDA assumption represents a 13% discount to PTTGC’s current EV/EBITDA of c.9.7x. We believe that the upside for PCHEM is limited at this juncture but would warrant a re-rating if our inference on lower polyethylene prices does not materialise in the coming months.

Source: Hong Leong Investment Bank Research - 28 May 2021