PCHEM’s 1HFY23 results met our expectations but underwhelmed consensus. 1HFY23 core net profit plunged 75% YoY on weak product spreads and continued losses at Pengerang and its specialties chemical segment. Disruption in supply of gas feedstock also impacted plant utilization. We maintain our forecasts, TP of RM6.20 and UNDERPERFORM call.

Trailed far behind consensus. 1HFY23 core net profit of RM941m met our expectations at 47% of our full-year forecast but disappointed the market at only 28% of the full-year consensus estimate.

YoY, weak product spreads prevail. In spite of lower average selling product prices (ASP), topline expanded by 11% in 1HFY23 due to: (i) higher sales volumes, (ii) weaker MYR versus USD, and (iii) maiden contribution from the specialties segment (via newly acquired Perstop).

The increase in volumes was attributed to higher production as reflected in higher plant utilization (PU) of 89% (1HFY22: 79%). This was due to the absence of statutory turnaround activities and lower plant maintenance exercises.

However, 1HFY23 bottomline dipped by 75% YoY due to: (i) high earnings base in 1HFY22 that was propped by strong product spreads, (ii) increased costs for energy and utilities, (iii) drag from losses at its specialties segment, and (iv) pre-operating start-up costs at Pengerang Integrated Complex (PIC).

Disappointingly, the specialties segment reported 1HFY23 losses following consolidation of Perstop in 1QFY23. This was attributed to: (i) compressed margin, (ii) lower sales volumes, and (iii) FX loss on revaluation of shareholders’ loan (circa RM150m) following the depreciation of Swedish krona versus euro. Sequential profits were weak as well - where segmental EBITDA contracted by 57% and PAT losses expanded by more than 5-fold.

QoQ spark from olefins. On a brighter note, sequential bottomline expanded by 5% QoQ in spite of a dip in PU to 82% (1QFY23: 96%) and lower ASPs. This was driven by the olefins & derivatives (O&D) segment on the back of: (i) easing product spread compression – as evident from the surge in EBITDA margin to 16% (1QFY23: 8.8%), (ii) lower costs for energy and utilities, and (iii) narrowed EBITDA losses at PIC. The latter was driven by increased evacuation of volumes to South East Asian markets which enabled PIC’s LBITDA to narrow to c. RM70m (1QFY23: c.RM100m)

The above more than offset the impact of lower ASPs for ammonia (- 56%), polymer and O&D products (-7%), and urea (-15%).

Meanwhile, the dip in 2QFY23 plant utilisation (PU) was attributed to feedstock gas supply disruptions at PC Methanol Labuan and PC Fertiliser Sabah. Hence, this led to unplanned plant shutdowns that caused PU at the fertilizers and methanol segment to plunge to 73% (1QFY23: 97%). Nevertheless, plant operations have since normalized following this 20-day disruption.

Briefing highlights. Key takeaways from PCHEM’s analyst briefing include the following:

1. PCHEM is mulling over a plan to switch Perstop’s functional currency to euro (current: Swedish krona). Hence, this will remove earnings volatility caused by unrealized forex translation on shareholder loans.

2. The company alluded that Perstop will likely face sustained headwinds in the near-to-medium term. This emanates from: (i) intense competition following the influx of cheap Chinese imports to Europe, and (ii) soft demand from certain end markets – especially the construction industry. Nevertheless, Perstop will continue cost optimization measures to mitigate the challenges above. Moreover, the imminent start-up of its new plant in India is also expected to lower its cost structure and enable it to compete more effectively versus Chinese producers.

3. The group revealed that it reached final investment decision (FID) to acquire the Maleic Anhydride (MAn) plant from BASF-Petronas Chemicals Sdn Bhd in Gebeng, Pahang. Following the upgrade and rejuvenation of the facilities to produce refined MAn, the plant is expected to be operational by 2HCY25. This FID is in-line with the group’s aspirations for specialty chemicals to contribute 30% of revenue by 2030.

Protracted supply glut. We believe that demand for petrochemicals will remain weak on the back of: (i) lingering concerns of a hard landing for the US economy, (ii) contagion from China’s property downturn, and (iii) sluggish demand in China, particularly in the automotive sector. Evidently, Bloomberg reported that Asian polyolefin producers remain cautious on procurement, by maintaining just enough inventories to meet end-user demand. Furthermore, the global glut in petrochemicals is expected to worsen in 2023 due to: (i) excessive capacity expansion at China, and (ii) inventory destocking. According to Wood Mackenzie, China’s output growth in 2023 will result in domestic surplus of 4.24m tons of ethylene and 8.69m tons of propylene. On the same subdued note, ASPs for nitrogen fertilizers are expected to decline as supply normalizes following the retreat of natural gas feedstock prices.

Forecasts. Maintained.

We also maintain our TP of RM6.20 that is based on 14.3x FY24F PER - in line with the valuations of Asian peers (e.g. PTT Chem, LG Chem, Formosa, LCTITAN). There is no change to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintain UNDERPERFORM.

We are cautious due to: (i) oversupply for intermediate petrochemicals as highlighted above, (ii) global ramp-up of fertilizer production amidst soft demand, and (iii) sustained cost drag from start-up expenses at PIC.

Risks to our call include: (i) strong global economic growth leads to demand recovery, (ii) dip in crude oil prices leading to cheap feedstock costs at PIC, and (iii) market supply tightens due to plant outages and delay of upcoming capacity

Source: Kenanga Research - 23 Aug 2023