• 2Q20 core net profit of RM260m missed our/consensus expectations, accounting for 46% and 45% of respective full-year estimates
• Weaker 2Q20 was a given with product prices declining by 3-33% qoq following the crash in global oil prices. Cutting our 2020-22E EPS by 4-9%
• 2H20 improvement likely to be driven by gradual recovery in product ASP, but 3Q F&M plant utilisation will be affected by landslide for 2 of its plants for roughly one month. 4Q20 should see one plant turnaround in Gebeng. 2021 target is for 4 plants to turnaround. Reiterate Sell call with new TP of RM4.70

6M20 Sales Volume Fell 3% Amid Lock Down

Petronas Chemicals (PCHEM) reported a weak 2Q20 core PATAMI of RM260m (-54% qoq, -76% yoy), bringing 6M20 results to RM829m (-57% yoy). The result missed our and consensus estimates, accounting for 46% and 45% of respective full-year forecasts. Overall, revenue was weak in 2Q20 with a higher effective tax rate further dragging down earnings. Both Olefins & Derivatives (O&D) and Fertiliser & Methanol (F&M) revenue and EBITDA fell by 29-33% and 52-56% yoy on the back of softer demand and on a declining ASP trend. PCHEM has allocated USD200-250m to expand its specialty chemical business over the next 3 years.

Lowering Our 2020-22E EPS by 4-9%

We lower our 2020E EPS by 9% to adjust for the weaker-than-expected 2Q20 revenue and plant disruption in 3Q. Overall, 2H20 is on track to recover on the back of a gradual recovery in ASPs, but the short disruption and plant turnaround will drag down earnings slightly. We also trim our 2021-22E EPS by 4% to reflect weaker demand and a less aggressive ASP recovery.

Worst is over, but facing longer-term structural decline; reiterate SELL call

Despite RAPID’s new capacity coming on stream in 1Q21, the naphtha-based feedstock plant should see overall group margins being compressed vs. being a pure gas player in the past, where PCHEM managed to command premium margins. Likewise, product prices may remain suppressed in the coming years with the ample China and US capacities coming on stream. PCHEM is now trading at a 21x 2021E PER, above its historical mean of 19x since listing. Valuation appears lofty amidst the current weak environment and a structural margin de-rating. We reiterate our Sell rating, despite lifting our 12-month TP to RM4.70 (from RM4.61), based on a higher 2021E PER of 16x (from 15x), -0.5SD of its mean level since listing.

Source: Affin Hwang Research - 21 Aug 2020