2Q21 core profit of RM1,830m (+31% QoQ, +889% YoY) and 1H21 core profit of RM3.2bn (+366% YoY) came in above our (76%) and consensus’s (79%) expectations due to better than expected ASP for most of its products. PCHEM is on track to record its highest ever annual profit in FY21 due to its exceptional performance in 1H21. However, we believe that the prices for most of its products are expected to taper off in the coming months, resulting in lower profits in FY22. Maintain HOLD at unchanged TP of RM8.75 as we roll forward our valuations to FY22. Our TP is based on 7.0x FY22f EV/EBITDA (from 8.0x previously). PCHEM has already risen by almost 50% since our BUY call upgrade on the 29 Sept 2020 and we believe that the upside for PCHEM is limited at this juncture.

Above expectations. 2Q21 core net profit of RM1,830m (+31% QoQ, +889% YoY) and 1H21 core profit of RM3.2bn (+366% YoY) came in above our/consensus’ constituting 76/79% of full year estimates due to stronger than expected petrochemical product prices. 1H21 core profit was derived after adjusting for -RM99m in exceptional items, comprising of (i) -RM34m of inventory write-backs and (ii) -RM65m of amortisation of deferred income.

Dividend. Declared first interim dividend of 23 sen/share going ex on 10 Sep 2021 (vs 5 sen/share SPLY).

QoQ. Core earnings increased by 31% due to higher overall product prices, driven by (i) higher crude oil prices, (ii) strong demand for plastic products and (iii) higher plant utilisation rate of 97% (from 90%).

YoY. Core earnings were up 889% due to higher overall product prices as demand for petrochemical products rose due to higher global economic growth due to vaccinati on rates and the re-opening of economies despite lower plant utilisation rate of 97% (from 100%).

YTD. Core earnings were up 366% for the same reasons mentioned above.

Outlook. We foresee petrochemical prices tapering in the medium term after the global container shortage issue is resolved and more ethylene supply enters the market. Polyethylene prices have already declined by c.12% QoQ and we expect further declines to happen when more ethylene crackers commission in Asia. Nevertheless, we expect its PReFChem plant to only contribute positively to its profits in FY22.

Forecast. We raise our FY21 forecast by 38% while maintaining our FY22/23 forecast as we believe that petrochemical product ASP is expected to fall in FY22.

Maintain HOLD at unchanged TP of RM8.75. We have maintained our HOLD call with an unchanged TP of RM8.75 as we roll forward our valuations to FY22. Our TP is based on 7.0x FY22f EV/EBITDA (from 8.0x previously) as we believe that general product prices are expected to taper off in FY22. We believe that the upside for PCHEM is limited at this juncture despite its highest ever profit recorded this quarter as the potential downward trend of petrochemical prices might deter investors from accumulating the stock.

Source: Hong Leong Investment Bank Research - 26 Aug 2021