We downgrade PCHEM to a HOLD (from Buy) as we do not see nearterm catalysts for the stock. The continued uncertainty over the trade talks between the US and China has taken a toll on petrochemical prices. We expect soft 2Q19 earnings, which will likely further weaken in 3Q with a heavy plant turnaround. We cut 2019-21E EPS by 18–19% and lower our target price to RM8.30 (from RM10.10).

Judging From 2Q19 Average Selling Prices and Forex…

Polyethylene (PE) product prices declined by 4% qoq in 2Q19, while that for polypropylene was relatively flat. In the fertiliser and methanol (F&M) segment, urea price was up 1% qoq on better SEA demand, but methanol price saw a 3% qoq decline, currently at the year-low of US$259/tonne. We expect the 2H19 Brent oil price to trade in the range of US$65–70/bbl, hence capping any drastic recovery in product ASPs.

…2Q Earnings Look Muted, Likely Weaker 3Q on Heavy Plant Turnaround

On the expectation of softer demand and ASPs generally not showing any recovery, we expect the upcoming 2Q19 profit to be soft (1Q19 core profit of RM845m), partly offset by the 2% appreciation in the USDMYR qoq. In addition, with the US and China trade talks still looking uncertain and rather unfruitful, we believe product ASPs would likely remain low for the rest of 2019. Meanwhile, overall 3Q19 plant utilisation is expected to be lower as PCHEM undergoes its heaviest plant turnaround exercise in 2019 with the cracker plant to be shut down for more than a month and the polymer and fertiliser plants for 30 days. As such, we expect earnings to be weaker qoq, assuming no recovery in ASPs. With consensus forecasts still looking on the high side, we see further downside risks.

Demand Concern Due to Prolonged Trade Talks Dragging on ASPs

We cut our FY19-20 EPS forecasts by 18% to account for weaker average selling prices for methanol (-15% to US$280/tonne) and PE products (-5% to US$950–1,000/tonne). We also slashed our FY21 EPS forecast by 19% mainly to account for weaker long-term PE prices (lower by 25% to US$900/tonne), as a result of rising capacity in China and softer global demand.

Source: Affin Hwang Research - 22 Jul 2019