4QFY20 continues PCHEM’s recovery trend, with earnings lifted by stronger production volumes amidst higher plant utilisation, as well as elevated product prices. Moving forward for the immediate-term, in tandem with the rebound in crude oil prices, petrochemical prices have also managed to hold steady, and thus, we continue to expect its upcoming 1QFY21 quarter to show another stable set of results. Maintain MP, with higher TP of RM7.70.

FY20 above expectations. As highlighted in our previous report, this quarter saw a one-off cost on the associates line of USD56m (RM232m) arising from the group’s disposal of its 40% stake in Butanediol Complex as part of its portfolio realignment efforts. Stripping this off, plus other non-core items e.g. forex, inventories write-downs, FY20 would have reported a core net profit of RM1,919m, coming in 27% above our, and 14% above consensus, full-year forecast. This was mainly due to higher-than-assumed fertilisers and methanol product prices. The group also announced an interim dividend of 7.0 sen per share – bringing full-year dividends to 12.0 sen, also above expectations.

4QFY20 continued with the recovery trajectory. Sequentially, 4QFY20 core net profit of RM809m continued with its current recovery trajectory growing 45% QoQ. Apart from the higher plant utilisation (94% vs 90%) resulting in higher production volumes (+5%), the quarter also benefitted from steeper product prices. Cumulatively for FY20, despite the Covid-19 pandemic, the group saw its highest annual production at 10.7m MT on higher plant utilisation (94% vs 92%). However, core profit was still weaker by 34% YoY, dragged by poorer product prices, especially in 1HFY20.

Petrochemical prices to stay firm. In tandem with the rebound of crude oil prices, petrochemical prices have managed to hold steady of late, further helped by global supply shortages, and export limitations on high freight costs. As such, we continue to expect its upcoming 1QFY21 quarter to remain at least as strong (barring no unexpected plant shutdowns). While PCHEM is now going into a new 3-year heavy turnaround cycle, management reassured that annual plant utilisation will remain above 90%, and hence, we will see little impact from here. Meanwhile, its Pengerang plant is expected to start commercialisation in 2HFY21, which upon commercialisation, the group will have to start recognising fixed depreciation and finance costs of ~RM600m/year. Given the gestation period, we believe the plant may take >12 months to see positive EBITDA contributions. Nevertheless. bottom-line impact from this could be mitigated by higher product prices from current productions.

Maintain MARKET PERFORM, with higher TP of RM7.70. Post full- year results, we roll forward our valuation base year to FY22E, pegged to unchanged valuations of 21x PER at +0.5SD above its mean. Our FY21E earnings were raised by 2% following higher product price assumptions, while we also introduce new FY22E numbers.

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

Source: Kenanga Research - 24 Feb 2021