1QFY21 CNP surpassed expectations on the back of strong margin spreads and product prices, masking lower production volumes. Going forward, we believe petrochemical prices are likely to remain firm in the coming quarter, although some weakness could be expected in 2HFY21. Nonetheless, PCHEM is still committed to a >90% overall plant utilisation in FY21, despite maintenance activities. Maintain MP with a higher TP of RM8.90.

1QFY21 above expectations. 1QFY21 core net profit of RM1,328m came in above expectations at 53% of our, and 41% of consensus, full- year earnings forecast, mainly due to stronger-than-expected margin spreads for its olefins and derivatives products. No dividends were announced, as expected.

Superbly strong quarter. YoY, 1QFY21 core net profit more than tripled, thanks to stronger product prices and margin spreads, especially for its olefins and derivatives products. This managed to offset the overall drop in production volumes (-6% YoY) amidst lower plant utilisation (90% vs. 94%) from plant turnaround and maintenance works. QoQ, 1QFY21 core net profit grew 64%, similarly thanks to stronger product prices and margins spread, especially for its olefins and derivatives, masking drop in production volumes (-6% QoQ) given the lower plant utilisation (90% vs 94%).

Petrochemical prices staying firm. We believe petrochemical prices are likely to remain firm in the coming quarter, on the back of continued tight supply and demand recovery, although some weakness is largely expected in the 2H of the year. Meanwhile, PCHEM is still committed on a >90% overall plant utilisation despite plant maintenance activities. Pengerang is still on track for starting-up in 2HFY21 (likely to be in 3QFY21, having pushed back from early-2021 previously), with commercialisation expected in late-2021/early-2022.

Maintain MARKET PERFORM. Post results, we raised FY21E/FY22E earnings by 51%/16% to account for higher margin spreads. As a result, our TP is also raised, to RM8.90 (from RM7.70 previously), pegged to unchanged valuation of 21x PER on FY22E EPS – broadly in-line with the stock’s mean valuations.

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

Source: Kenanga Research - 28 May 2021