PCHEM guided for stable to slightly weaker outlook for prices of its products due to a soft global economy partially cushioned by supply constraints, which does not differ from our view that the downstream segment of the oil & gas industry is still lacking catalysts. We maintain our forecasts, TP of RM6.28 and MARKET PERFORM call.

PCHEM did not differ from our view that the downstream segment of the oil & gas industry is still lacking catalysts during its analyst briefing yesterday. The key takeaways are as follows:

1. PE prices outlook stable. Among polyethylene products, the outlook of low-density polyethylene (LDPE) still appears to be the firmest in the near term. This is due to high plant turnaround activities globally and limited new capacity in China. Meanwhile, the outlook of high-density polyethylene (HDPE) is slightly weaker over the near term due to incoming new capacity in the ASEAN region and China.

2. The methanol market is to be slightly weaker in 2HFY24. PCHEM expects methanol prices to range between USD330- 355/mt, which is weaker than the average of USD355/mt in 1HFY24, due to the addition of multiple new capacities coming online in Southeast Asia (1.8m mt) and the US (1.8m mt). Additionally, weak global economic growth continues to weigh on the demand for methanol. In China, coal-to-methanol plants are operating at low utilisation rates due to high coal cost, which provides slight support to methanol prices.

3. Urea prices are to remain in historical ranges. While China's export restrictions on fertilisers are still in place, the demand for urea has been hampered by lower purchase tender sizes from India in 1HCY24, largely due to weather conditions. Hence, we expect urea prices to range close to USD322/mt, which is its 10- year historical average. On the supply side, India is expected to add 1m mt of urea production capacity, thereby reducing the need for significant increases in urea imports. PCHEM also expects ammonia prices to remain stable, as demand recovery from the industrial sector is still tepid coupled with flattish cost of feedstock, particularly natural gas.

Forecast. Maintained.

Valuations. We maintain our TP of RM6.28 pegged to unchanged 15x FY24F PER - in line with the valuations of Asian peers, i.e. PTT Chem, LG Chem, Formosa and LCTITAN (Not Rated).

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 - 2 Aug 2024