• 3Q20 core net profit of RM466m was above our/consensus expectations; 9M20 accounted for 80% and 81% of respective full-year estimates
• 4Q20 is expected to see a RM232m impairment charge as a result of winding up its Butanediol (BDO) plant, where it holds a 40% stake. Elsewhere, no plant turnaround is expected this year, but 2021 is set to be another heavy plant turnaround year for a total of 5 plants
• With 4Q prices outlook stabilizing, we raise our EPS forecasts by 9-11%. Raise our target price to RM5.80 (from RM4.70). Reiterate Sell.

Results made up 80% and 81% of our and consensus full-year forecasts

PCHEM registered a 3Q20 core PATAMI of RM466m, a significant improvement albeit from a low base in 2Q20. 9M20 core PATAMI was still down 50% yoy, impacted by the weak global demand amid the global pandemic situation, which also saw global oil and petrochemical prices crash. PCHEM’s 9M20 production volume was higher, reflected through its 2ppts higher overall plant utilisation (95% vs 92%), but overall weaker ASP and lower F&M sales volume dragged earnings. With revenue 13% weaker, this led to a 7.5ppts contraction in EBITDA margin. Despite the weaker earnings, cash balance was sustained at RM12.6bn on lower capex spending.

Segmental breakdown

• Olefins and Derivatives (O&D) revenue was down 12% yoy, primarily attributable to weaker product ASP. EBITDA was relatively flattish on the back of better product spreads and lower inventories and maintenance-related costs.
• Fertiliser and Methanol (F&M) revenue and EBITDA were down by 10% and 5% yoy with PC Fertiliser and Methanol plants having undergone a <1-month shutdown, as feedstock was disrupted following a landslide incident at a Sabah–Sarawak gas pipeline, affecting supply.

Reiterate our Sell rating

The O&D (polymers, MEG and PX) price outlook is expected to remain stable in 4Q20, while ethylene looks to improve on better downstream demand. Urea, ammonia and methanol prices are also expected to hold up on the back of stable demand. To reflect the more stable market environment, we raise our 2020-22E EPS forecasts by 9-11% and lift our target price to RM5.80, pegged to higher PER multiple of 18x (from 16x), slightly under its 10-year mean at 19x. Reiterate our Sell rating as current valuation at 21x 2021E EPS appears lofty. Key upside risks include a sharp recovery in the ASP, further strengthening in the US$ and a faster-than-expected RAPID operational breakeven.

Source: Affin Hwang Research - 19 Nov 2020