PCHEM’s 9MFY23 results disappointed due to production disruption. Its 9MFY23 core profit plunged 74% YoY due to weaker product spreads. We believe its earnings have bottomed in FY23 and it is poised for a recovery in FY24. We cut our FY23- 24F net profit forecasts by 11% and 8%, respectively, reduce our TP by 8% to RM6.74 (from RM7.30) but maintain our MARKET PERFORM call.

Slightly below expectations. Its 9MFY23 core profit of RM1.4b (after excluding EI of RM185m forex gain and RM29m inventory write down) disappointed at only 74% and 55% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weaker-than-expected plant utilisation, particularly at olefin & derivatives (O&D) division due to an unplanned shutdown due to power disruption. No dividends were declared in the quarter.

YoY, its 9MFY23 revenue increased 6% YoY mainly due to uptick in the O&D division’s top line due to a higher sales volume and the inclusion of Perstop’s revenue into the specialties division upon the completion of its acquisition. This was partially offset by weaker revenue from the fertilisers & methanol (F&M) division due to lower product prices. Its plant utilisation was flat YoY at 85%.

However, its core net profit plunged by 74% due to: (i) weaker product spreads at the O&D division, (ii) weaker urea and methanol prices at the F&M division, and (iii) losses at the specialties division on margin squeeze amidst intense competition.

QoQ, its 3QFY23 revenue contracted 5% as plant utilization fell to 77% from 82% three months ago due to higher plant maintenance activities while the specialties division continued to be hurt by weak product prices. However, its core net profit contracted by a steeper 31% due to high plant turnaround activities, partially cushioned by a better showing from the F&M division on lower feedstock costs.

The key takeaways from PCHEM’s analysts briefing are as follows:

1. Its Kertih cracker plant was shut down (unplanned) in Oct 2023 due to power disruptions but had since returned to full operation. It guided for plant utilization of 85% and above in FY23 (vs. 90% a year ago).

2. It has secured ethane and propane (feedstock for O&D) supply contract extension from Petronas for another year throughout FY24.

3. Its Pengerang Integrated Complex (PIC) is targeted to be fully operational by 1QCY24. Currently, the facility is still at the pilot production stage. The good news is its loss before interest, depreciation and amortization halved QoQ on an increased volume.

Outlook. While it appears that polyolefin prices (the O&D division) have stabilised at slightly under the USD1,000/MT level, its near-term demand outlook remains tepid on soft global demand. On the supply side, the new petrochemical chemical production capacity coming onstream in China in 2024 will cap the recovery in polyolefin prices.

Meanwhile, the urea market has eased recently with prices at USD299/MT (from USD345/MT in 1HFY23) due to easing of supply concerns globally and weak global demand. We believe similar dynamics will persist into FY24 although demand for urea is expected to recover gradually YoY. Losses in its specialities division are expected to narrow as its US and Europe markets are showing early signs of recovery.

Forecasts. We cut our FY23F earnings by 11% after adjusting for lower plant utilisation to 86% from 89% and FY24 earnings by 8% after assuming lower urea price assumption of USD350/MT (from USD400/MT).

As a result, we cut our TP by 8% to RM6.74 (from RM7.30) which is based on an unchanged 15x PER FY24F - in line with the valuations of Asian peers (e.g. PTT Chem, LG Chem, Formosa, LCTITAN). There is no change to our ESG rating (3-star rating) as appraised by us (see Page 5).

We like the company due to: (i) signs of bottoming of polyolefin prices supported by crude prices, (ii) specialty chemicals division potentially seeing trough earnings in FY23 with FY24 a year of expected gradual recovery, and (iii) its superior margins vs. its peers due to a favourable cost structure. However, the upside to its earnings and hence share price is capped by the limited upside of its product prices amidst a tepid global economic outlook. Maintain MARKET PERFORM.

Risks to our call include: (i) worse-than-expected economic growth globally leading to weaker petrochemical prices, (ii) PIC costs exceeding estimates due to operational issues, and (iii) worse-than-expected oversupply in specialty chemicals particularly in European region.

Source: Kenanga Research - 29 Nov 2023