We expect strong earnings delivery from PCHEM in 2H21, uplifted by both: (i) firm product spreads for its O&D segment, which can be seen from stable polyethylene product prices (HDPE, LDPE and LLDPE) and (ii) skyrocketing urea and methanol prices, which would be supportive of earnings from the group’s F&M segment. With that, we upgrade PCHEM to BUY (from Hold) with a higher TP of RM10.65 (from RM8.75 previously) as we view that PCHEM is on track to achieve its best-ever annual profits in FY21. Our valuation is based on 9.0x FY22F EV/EBITDA, which is at a slight discount to its 5-year historical pre pandemic mean EV/EBITDA of 9.5x.

1H21 results recap. PCHEM recorded a stellar 2Q21 core net profit of RM1,830m (+31% QoQ, +c.10x YoY). Cumulatively, 1H21 core net profit grew more than 4.5x YoY to RM3.2bn (from RM691m in 1H20). The strong 1H21 performance was boosted by a few key factors: (i) improved product spreads, backed by higher downstream polyethylene product prices, which led to commendable 1H21 revenue and profit of RM5.9bn (+46% YoY) and RM1.8bn (+129x YoY) respectively for its O&D segment and (ii) elevated urea and methanol prices in 2Q21, resulting in impressive 1H21 revenue of RM3.8bn (+47% YoY) and profit of RM1.4bn (+159% YoY).

Product spreads remained relatively steady in 3Q, uptick seen in early-4Q. We will be using HDPE, LDPE and LLDPE prices as indicators for PCHEM’s product spreads. Based on our tabulation from Bloomberg data, we find that average polyethylene product prices remained somewhat firm, with a slight decline of c.3-9% in 3Q21 from 2Q21. With that, we will not be surprised should there be a slight decline in profit contribution QoQ from PCHEM’s O&D segment in 3Q21. On the other hand, we highlight that product prices were up 37-61% YoY in 9M21. We also noticed a decent uptick and recovery in product prices in early-Oct 2021 (Figure #2), which we believe would augur well into the rest of 4Q21.

Skyrocketing urea and methanol prices. Both urea and methanol prices continued its uptrend in 3Q21, up 16% and 6% respectively from 2Q21. Cumulatively for 9M21, urea prices were up 75% YoY while methanol prices increased 66% YoY. We believe that urea prices will continue its uptrend in the near-medium due to the cost-push effect from elevated feedstock (natural gas) prices. Hence, we expect PCHEM’s F&M segment to buoy the group’s overall performance in the next few quarters.

3Q21 likely marginally higher QoQ, but significantly higher YoY. This is judging from 3 key highlights: (i) no major turnarounds from July-Sep 2021, (ii) relatively firm polyethylene product prices (only 3-9% decline QoQ, but 23-40% increase YoY) and (iii) higher urea and methanol prices (up 16 and 6% respectively QoQ, up 106% and 79% YoY respectively) – of cause, barring any unforeseen swings in cost structure. PCHEM’s 3Q21 results are tentatively scheduled for release on 22 or 23 Nov.

Outlook for 2H21. We expect PCHEM to deliver robust earnings in 2H21 on the back of its O&D and F&M core segments driven by: (i) resilient polyethylene product prices, and (ii) elevated urea and methanol prices due to the cost-push effect from elevated feedstock (natural gas) prices. We believe that PCHEM is also on-track to record its best-ever annual profits in FY21.

Upgrade to BUY with a higher TP of RM10.65. We upgrade PCHEM to BUY (from Hold) with a higher TP of RM10.65 (from RM8.75). Our valuation is based on 9x FY22 EV/EBITDA, which is at a slight discount to its 5-year historical pre-pandemic mean EV/EBITDA of 9.5x.

Source: Hong Leong Investment Bank Research - 14 Oct 2021