PCHEM’s 9MFY22 results met expectations, as the lower plant utilisation was more than offset by improved product prices amidst higher crude oil prices. Going forward, product prices may see mild tapering, albeit still far elevated compared to 2020-2021 levels. Maintain our forecasts, OUTPERFORM call and TP of RM11.00.

9MFY22 within expectations. PCHEM’s 9MFY22 core net profit of RM5.5b came in within expectations at 79% and 72% of our full-year forecast and the full-year consensus estimate, respectively.

Slightly improved earnings. YoY, 9MFY22 core earnings grew 7%. While overall plant utilisation was lower (85% vs. 94%) from higher plant statutory turnaround and maintenance activities, this was more than offset by the higher product prices in tandem with the improved crude oil prices.

Briefing’s highlights. The key takeaways from its analyst briefing are as follows:

1. Product prices may see mild tapering. With the dampening of downstream demand amidst inflationary pressures and recessionary concerns, coupled with more capacities resuming operations, especially from China, we see a possible moderation of petroleum product prices in the near-to-mid-term. That said, we firmly believe that product prices will remain elevated as compared to 2020-2021 levels.

2. Perstorp expected to start earnings contributions next quarter. Having fully completed its acquisition on Swedish specialty chemicals player Perstorp Holdings, we expect its earnings contributions to kick-in as soon as next quarter – which could lift its earnings by ~RM100-200m per quarter, based on our estimates. PCHEM is still keen on diversifying its portfolio further into speciality chemicals, which typically yields more stable margins than conventional petrochemicals, and has set a long-term aim of ~20- 25% of its earnings portfolio to come from specialty chemicals in the next ~5 years (from ~5-10% currently).

3. PIC still under shutdown. The Pengerang Integrated Complex (PIC) remains under shutdown after a fire and explosion incident last month. Although the incident was not within the petrochemical facilities in which PCHEM has 50% direct equity, given the integrated nature of the complex, a temporary shutdown is required to ensure the safety and well-being of its employees and surrounding communities. We believe this shutdown will likely result in further delays for its commercialisation, which was expected to be early-2023. Do note that the products from the Pengerang plant will be naphtha-based, and hence, may introduce an element of volatility to PCHEM’s earnings. Given the current low polymers naphtha margins spread, we believe that a delayed commercialisation may actually not be an entirely bad thing.

Forecasts. Unchanged.

Maintain OUTPERFORM, with unchanged TP of RM11.00 – pegged to 11x PER on FY23F, in line with large petrochemical players in the region. There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like PCHEM as a beneficiary of the elevated crude oil price environment. Given its arrangement with Petronas, PCHEM benefits a more favourable feed-cost structure, while peers may be hampered by the volatile input costs. Additionally, PCHEM also enjoys dominant market share regionally, which will be further cemented by PIC – increasing its capacity by ~15% when it eventually starts commercial operations.

Risks to our call include: (i) volatile fluctuations in petrochemical product prices, and (ii) unscheduled plant maintenance, hurting utilisation.

Source: Kenanga Research - 29 Nov 2022