Strong 1HFY21 earnings beat expectations, thanks to higher margin spreads in tandem with higher average product prices. Moving forward, we believe some products prices could see tapering off on the back of normalisation of supply after the disruptions suffered in 1HFY21 coupled with new waves of capacity additions in the market. Nonetheless, PCHEM’s full-year plant utilisation is expected to remain stable at ~94% (flattish YoY), while its Pengerang complex is also anticipated to commence within the year. Maintain MP with lower TP of RM8.55.

1HFY21 beats expectations. 1HFY21 core net profit of RM3,196m came in above expectations at 84% of our, and 78% of consensus, full- year earnings forecasts, largely due to stronger margin spreads amidst higher average product prices. Likewise, announced first interim dividend of 23.0 sen per share also came above expectations.

Strong results lifted by higher margin spreads. PCHEM posted a strong 2QFY21 with core net profit of RM1,868m – representing a 41% jump QoQ. This is in tandem with the higher margin spreads amidst higher average product prices, coupled with higher production volumes from better plant utilisation (97% vs 90%). YoY, the quarter’s earnings jumped multi-folds, similarly thanks to the surge in margin spreads and average product prices, offsetting the slightly softer production volumes from lower plant utilisation (97% vs 100%). Cumulatively, YTD-1HFY21 earnings more than quintupled, similarly helped by the strong average product prices lifting margin spreads, more than offsetting slightly softer volumes from lower plant utilisation (average 94% vs 97%).

Expecting normalisation in prices. Moving forward into the 2HFY21 and further into 2022, we are largely expecting some product prices to see slight pull-backs, given the normalisation of supply after the disruptions suffered in 1HFY21 coupled with new waves of capacity additions in the market. Nonetheless, overall plant utilisations are expected to remain stable, with the full year anticipated to average around ~94% (flattish YoY). Its Pengerang Integrated Complex (PIC) is still on-track for commencement within the year, and is guided to reach an average utilisation of 60-70% throughout 2022. While the additional capacity can be a welcomed positive, we do note that given its naphtha feedstock base, this could introduce some margins volatility to the group moving forward.

Maintain MARKET PERFORM. Post results, we raised FY21E/FY22E earnings by 57%/26% on the back of higher average product prices and margin spread assumptions. Nonetheless, our TP is slightly reduced to RM8.55 (from RM8.90), as we lowered our ascribed valuations to 16x PER on FY22E (from 21x previously) – in view that earnings may have peaked for the year given the milder prices outlook on certain products. We feel our ascribed valuations to be well justified, as it is broadly in- line with the stock’s pre-pandemic mean valuations.

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

Source: Kenanga Research - 26 Aug 2021