3QFY20 saw a recovery in earnings, as expected, amidst a rebound in product prices from the bottom in the previous quarter. Its Pengerang plant is scheduled for a start-up in 1QFY21, with commercialisation 1-2 quarters thereafter. However, we are not entirely positive on the commercialisation given negative EBITDA contribution during its gestation phase. Commencement of the plant will also further increase fluctuations of the group’s product margins given its exposure to naphtha-based products. Maintain MP with TP of RM6.45.

9MFY20 broadly within expectations. 9MFY20 core net profit of RM1,112m (adjusted for net forex gains and net inventories write- backs), is deemed to be broadly within expectations at 73% of our, and 69% of consensus, full-year earnings forecast. This is considering the weak 1HFY20, especially the slump in earnings in 2QFY20, due to weak product prices amidst peak lockdowns globally. No dividends were announced, also as expected.

Recovery in 3QFY20. 3QFY20 quarter core net profit came in at RM560m, representing a 3.5x jump QoQ, mainly due to the recovery in product prices from the bottom witnessed in the previous quarter. The higher product prices managed to offset the lower production volume (- 9%), as a landslide incident at supplier’s facilities in Sabah resulted in lower plant utilisation during the quarter (90% vs 100%). The plants have already resumed full operations during the quarter. YoY, 3QFY20 also managed a jump of 19% in core earnings. This was mainly due to the higher plant utilisation (90% vs. 81%) from lesser turnaround activities, offsetting poorer product prices.

Cumulatively, 9MFY20 saw a decline in core earnings by 53% YoY. This was largely attributable to poorer product prices, in tandem with the declining crude oil prices amidst the global Covid-19 pandemic.

Pengerang geared for start-up in 1QFY21. PCHEM is aiming for an integrated start-up of its Pengerang Integrated Complex (PIC) in 1QFY21, with commercialisation to start 1-2 quarters thereafter. However, we are not all positive on the commencement of the plant, as the plant would be loss-making immediately upon commercialisation. Upon commercialisation, the group will have to start recognising fixed costs of depreciation and finance expenses amounting to possibly up to ~RM600m/year. We believe the plant may take >12 months to see positive EBITDA contributions. Additionally, the Pengerang plant would also expose the group to naphtha-based products, potentially increasing fluctuations in product margins, and also heightening the group’s earnings correlation to crude oil prices.

Meanwhile, in the more immediate-term, petrochemical prices have been steadier of late, and thus, we may expect to see another stable quarter going into 4QFY20. Note that 4QFY20 may see a one-off charge of USD56m (~RM232m) following the disposal of an associate (40% stake in Butanediol Complex) as part of a portfolio realignment exercise.

Maintain MARKET PERFORM, and TP of RM6.45, pegged to 21x PER on FY21E EPS, at +0.5SD above its 5-year. No changes were made to our FY20-21E earnings post-results.

Risks to our call include: (i) fluctuations in petrochemical product prices, and (ii) unexpected lower plant utilisation/maintenance.

Source: Kenanga Research - 19 Nov 2020