FY21 earnings almost quadrupled YoY, beating expectations, thanks to the continuously up-trending product prices. Going forward, in tandem with the strong underlying oil prices coupled with strong recovering demand, we believe product prices may continue sustaining its current uptrend, at least for the next 3-6 months. PCHEM’s stock price has also the highest correlation to oil prices, and hence, could serve as an alternative pick for traders looking for an oil price proxy. Upgrade to OUTPERFORM, with TP of RM11.00.

FY21 beats expectations. FY21 core net profit of RM7.3b came in above expectations at 109%/113% of our/consensus full-year earnings estimates, due to the stronger average selling prices (ASP). Additionally, the group had announced a dividend of 23.0 sen per share, bringing full-year dividends to 56.0 sen per share – also above expectations amidst the stronger earnings, coupled with a higher pay- out ratio for the year (61% vs 50% last year).

Strong earnings from higher ASPs. YoY, FY21 core earnings nearly quadrupled, thanks largely to the aforementioned higher ASPs seen throughout the year. This more than masked the slight drop in volumes (-3% YoY) amidst lower plant utilisation (93% vs. 94% last year). For the 4QFY21, core net profit of RM2.1b saw a 168% jump YoY, similarly thanks to the higher ASPs masking lower production volumes (-6%) given the lower plant utilisation (89% vs 94%). Sequentially, 4QFY21 core earnings continued to grow 9% QoQ. While ASPs continued to trend upwards throughout the quarter, the group’s olefins and derivatives segment did suffer some margins compression given the higher feedstock costs. Nonetheless, this was more than offset by the stronger fertilisers and methanol segment.

Product prices could continue uptrend over the short-term. In tandem with the strength in Brent crude oil prices of late, we believe ASPs for PCHEM’s products may continue trending up going forward, at least for 1HFY22. Price outlook for its for its olefins and derivative products are expected to continue improving over the next quarter amidst increasing demand, while prices for its fertilisers and methanol products should remain largely stable. Meanwhile, we understand that start-up for its Pengerang Integrated Complex (PIC) has been further delayed to end-2QFY22. As such, given an approximate 6 months start- up period prior to commercialisation, we believe PIC’s contribution this year should be rather minimal.

Upgrade to OUTPERFORM, with higher TP of RM11.00 (from RM8.75 previously) – pegged to an unchanged valuation of 16x PER (broadly in-line with the stock’s mean valuations), although we have rolled forward our valuation base-year to FY23E. Post results, we raised our FY22E earnings by 60% to account for higher ASP assumption, while introducing new FY23E figures.

Based on our study, PCHEM has the highest stock price correlation to Brent crude oil prices. If anything, given the recent strong rally in oil prices, we believe PCHEM can serve as a trading proxy for investors looking for exposure to oil prices within the sector.

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

Source: Kenanga Research - 25 Feb 2022