PCHEM continued to beat expectations, with sterling 9MFY21 results, as overall product prices remained stable. While 3QFY21 saw mildly weaker O&D product spreads, this was offset by the stable spreads in F&M. Going forward, we believe some O&D products could see mild normalisation, thus leading to slightly weaker earnings in coming quarters. Maintain MP with higher TP of RM8.75.

9MFY21 beats expectations. 9MFY21 core net profit of RM5,138m came in above expectations at 86%/92% of our/consensus full-year forecasts, due to the stronger fertiliser and methanol (F&M), coupled with lower-than-forecasted effective taxes. Additionally, the group had also announced a special dividend of 10.0 sen per share – which came in as a positive surprise, bringing YTD dividends to 33.0 sen.

Overall, a good set of results. YTD, 9MFY21 earnings more than quadrupled YoY, due to stronger product prices and margin spreads for olefins and derivatives (O&D), and F&M. As for 3QFY21, the quarter saw marginal earnings growth of 4% QoQ. While O&D suffered from a slight deterioration in margin spreads, this was offset by stronger F&M as product margins remained stable.

Expecting gradual normalisation of prices. Going forward from 4QFY21 and further into 2022, we are expecting some O&D products to see mild pull-back in prices, given the normalisation of supply after the disruptions suffered in 1HFY21 coupled with new waves of capacity additions in the market. Meanwhile, prices for its F&M products are largely expected to remain stable amidst higher natural gas prices and tightening of supply in China. The group’s Pengerang Integrated Complex (PIC) is expected to start up in 1QFY22 (slight delay from 4QFY21, as earlier expected), with a targeted average utilisation of 60- 70% during the initial years. 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, with higher TP of RM8.75 (from RM8.55 previously) – pegged to unchanged valuations of 16x PER on FY22E EPS, broadly in-line with the stock’s mean valuations. Post- results, we raised FY21E/FY22E earnings by 12%/2% to account adjustments to our F&M margin spread and effective tax assumptions.

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

Source: Kenanga Research - 23 Nov 2021