PCHEM’s FY23 results met our forecast but disappointed the market. Its FY23 core profit plunged 73% due to weaker product spreads across segments. We believe its earnings have bottomed and are poised for a gradual recovery. We largely maintain our forecasts, raise our TP by 2% to RM6.88 (from RM6.74) but maintain our MARKET PERFORM call.

Its FY23 core profit of RM1.7b (after excluding EI of RM74m inventory write-down and RM70m forex gain) met our forecast but missed the consensus estimate by 21%. It declared a DPS of 5 sen per share, bringing FY23 DPS to 13 sen.

YoY, its FY23 revenue was flattish. Reduced production volumes at the fertilisers & methanol (F&M) division, with overall plant utilisation dropping to 85% from 91% the previous year on increased unplanned maintenance activities, were cushioned by an improved showing at the olefins & derivatives (O&D) segment, driven by improved sales volumes and the inclusion of revenues from the newly acquired specialty chemicals business, Perstorp.

However, its core net profit plunged 73% on reduced product spreads in both the O&D and F&M divisions. Furthermore, the specialty chemicals division reported losses, also due to narrowed product spreads.

QoQ, its 4QFY23 revenue improved 6.3% as F&M division reported stronger top line driven by surge in the division’s plant utilisation rate (from 76% to 91%). Its specialty chemical division also reported better revenue driven by slight recovery in demand. However, its core profit dropped 16% due to worsened product spread at the O&D division.

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

1. The MOU with Sarawak Petchem for a joint feasibility study for a low-carbon ammonia and urea plant is logical for the group as Sarawak Petchem possesses the advantage due to its proximity to upcoming Kasawari carbon capture facility.

2. The company anticipates its overall plant utilization to exceed 90% in FY24 assuming minimum unplanned plant showdowns, following the completion of significant maintenance activities in FY23.

3. PCHEM has outlined a schedule for planned maintenance activities across its plants - the fertilizer plant in Gurun, Kedah in 1QFY24, Methanol Plant 1 in 2QFY24, Ethylene and Polyethylene plants in Terengganu in 3QFY24, and the ASEAN Bintulu Fertilizer plant in 4QFY24.

Outlook. Polyolefin prices have rebounded to around USD1,000/MT since the beginning of FY24, following a low of USD900/MT in 4QFY23, which we consider to be the cycle's bottom. The future recovery of polyolefin prices is closely tied to the economic recovery in China. Additionally, the specialty chemicals division experienced its lowest spreads in FY23 in our view, with initial signs of recovery emerging since the onset of FY24.

Forecasts. Our FY24F forecast is relatively unchanged.

Valuations. However, we raise our TP by 2% to RM6.88 from RM6.74 as we roll forward our valuation base to a 15x PER FY25F - 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).

Investment case. 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 to its product prices amidst a tepid global economic outlook particularly in China. 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 - 27 Feb 2024