PCHEM registered a record high 3Q21 core net profit of RM1,932m (+6% QoQ, +248% YoY), bringing 9M21 core earnings to RM5,154m (+313% YoY). The stellar results exceeded expectations at 88% of our full-year forecasts and 93% of consensus. We expect a sustained strong performance in 4Q21, uplifted by both: (i) stable polyethylene product spreads (HDPE, LDPE and LLDPE) and (ii) skyrocketing urea prices, which would be supportive of earnings for the group’s F&M segment. Maintain BUY with a higher TP of RM10.90 (from RM10.65/share previously) – based on 7.5x FY22F EV/EBITDA, which is at a discount to its 5-year historical pre-pandemic mean forward EV/EBITDA of 8.5x.

Exceeded expectations. PCHEM registered a record high 3Q21 core net profit of RM1,932m (+6% QoQ, +248% YoY). Cumulatively, 9M21 core net profit grew more than 4x YoY to RM5,154m (from RM1,247m in 9M20), having adjusted for: (i) RM34m of inventory write-backs; and (ii) RM100m of amortisation of deferred income. Key variance against our forecast was due to stronger than expected urea and methanol prices in 3Q21.

Dividends. PCHEM declared a special dividend of 10 sen/share going ex on 7 Dec 2021. Total dividends YTD amounted to 33sen/share.

QoQ. Profits were up 6% primarily due to higher urea and methanol prices, which continued its uptrend in 3Q21, up 16% and 6% respectively from 2Q21. On the flipside, PCHEM’s O&D segment was somewhat flat QoQ. Based on our tabulation from Bloomberg data, we find that average polyethylene product prices (HDPE, LDPE and LLDPE) remained somewhat firm, with a slight decline of c.3-9% in 3Q21 from 2Q21. 3Q21 performance was also boosted by higher JV/associate contributions due to higher product spreads from specialty chemicals mainly from the group’s JV with BASF Petronas Chemicals Sdn Bhd.

YoY. Profits were up more than 4x YoY due to the following reasons: (i) average polyethylene product prices was up 23-40% in 3Q21; (ii) urea prices more than doubled YoY; and (iii) methanol prices was up 79% YoY. Both PCHEM’s O&D and F&M segment more than tripled in profits in 3Q21.

YTD. Core earnings grew more than 4x due to similar reasons stated in YoY.

Outlook. We believe PCHEM will continue to deliver robust earnings in 4Q21 (albeit slightly weaker QoQ) on the back of its O&D and F&M core segments driven by: (i) stable polyethylene product prices; and (ii) skyrocketing urea 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. Based on our findings, urea prices in the Middle East are currently at US$801/mt (almost double the average price in 3Q21). See Figures 3 and 4 for more information. PIC-PETCHEM is guided to begin commissioning in January 2022. We highlight that there will be 4 planned turnaround activities in 2022 (same as 2021).

Forecast. We raise our FY21-23 net profit forecast by 17%, 28% and 15% respectively to reflect higher product spreads and higher urea price assumptions.

Maintain BUY with a higher TP of RM10.90. We maintain BUY with a higher TP of RM10.90/share (from RM10.65/share previously). Our valuation is based on 7.5x FY22 EV/EBITDA, which is at a discount to its 5-year historical pre-pandemic mean forward EV/EBITDA of 8.5x.

Source: Hong Leong Investment Bank Research - 23 Nov 2021