PCHEM registered 4Q22 core net profit of RM826m (-54% QoQ, -61% YoY), bringing FY22 core net profit to RM6,492m (-11% YoY). The results came in below expectations at 82%/85% of ours/consensus full-year forecast. We are in view that PCHEM’s profits will continue to decline in FY23f due to: (i) with the imminent start-up of new supplies globally, we strongly believe that the petrochemical upcycle is now behind us as product spreads are seen to be coming off their respective peaks; (ii) the recent hikes in gas price which will be a sore thumb to PCHEM; and (iii) a huge possibility of upward revision of input gas cost (which was previously fixed) during the renewal in mid-2023. With that, we downgrade PCHEM to SELL with a lower TP of RM6.54 (from HOLD, TP: RM9.20 previously) – pegged to a multiple of 10.5x, which is at a slight discount to the valuation of its global peers of 12x.

Below expectations. PCHEM registered 4Q22 core net profit of RM826m (-54% QoQ, -61% YoY), bringing FY22 core net profit to RM6,492m (-11% YoY) – after having adjusted for: (i) RM88m amortisation of deferred income; (ii) RM60m fair value gain; (iii) RM25m on inventories written back to net realisable value; (iv) RM120m on forex loss for revaluation of the group’s Pengerang loans; and (v) earn out costs amounting to RM177m. The results came in below expectations at 82%/85% of ours/consensus full-year forecasts respectively. Key variance against our forecast was largely caused by a severe blip in the Olefin & Derivative segment’s profit margins – mainly due to an increase in production cost (gas price), where the quantum of the hike was not disclosed.

Dividend. A second interim dividend of 16 sen was declared in 4Q22 (ex-date: 10 March 2023). FY22 dividends totalled 41 sen, falling short of our expectations of 51.3 sen.

QoQ. Core net profit dipped by -54% QoQ largely caused by a severe blip in the Olefin & Derivative segment’s profit margins due to: (i) significant increase in production cost (gas price); and (ii) lower product spreads. However, it was partially cushioned by: (i) an uptick in profit contribution from the Fertiliser & Methanol segment post-acquisition of Perstorp (which was completed in October 2022); and (ii) higher sales volumes. Bloomberg data shows that average polyethylene prices were down substantially QoQ, ranging from -6% to -13%. Urea prices dipped -11% while methanol prices were relatively flattish QoQ.

YoY/YTD. Core net profit was down -61% YoY and -11% YTD due to similar reasons mentioned in the QoQ paragraph. Our findings from Bloomberg data show that average polyethylene prices slid throughout the quarter in 4Q22, ranging from -19% to -30% YoY. On the other hand, urea and methanol prices dropped -30% and -13% YoY respectively.

Outlook. We are in view that PCHEM’s profits will continue to decline in FY23f due to the following reasons: (i) with the imminent start-up of new supplies globally (which has been delayed for c.2 years owing to the pandemic), we strongly believe that the petrochemical upcycle is now behind us as product spreads are seen to be coming off their respective peaks (we note that urea prices have declined -30% YTD 2023); (ii) the recent hikes in gas price which will be a sore thumb to PCHEM; and (iii) a huge possibility of upward revision of input gas cost (which was previously fixed) during the renewal in mid-2023. We strongly believe that PCHEM will be seeing a double whammy of decline in product spreads and an increase in input and production costs in 2023.

Forecast. We cut our FY23-24f net profit forecasts by 37% and 26% respectively to account for: (i) lower polymer ASPs and olefin product spreads; (ii) lower urea price assumptions; and (iii) higher opex.

Downgrade to SELL, TP: RM6.54. We downgrade PCHEM to SELL with a lower TP of RM6.54 (from HOLD, TP: RM9.20 previously) – pegged to an unchanged multiple of 10.5x, which is at a slight discount to the valuation of its global peers of 12x, as shown in Figure #5.

Source: Hong Leong Investment Bank Research - 24 Feb 2023