PCHEM’s 1HFY24 results were deemed below expectations as we expect more losses ahead from its Pengerang facility upon full commercial operations. Overall, product spreads have improved in 1HFY24 but we believe further progress will be slow and gradual and have been largely priced in. We cut our FY24-25F net profit forecasts, reduce our TP by 12% to RM5.52 (from RM6.28) which is already at its 5-year historical mean PER based on FY25F numbers, but maintain our MARKET PERFORM call.

Its 1HFY24 core profit of RM1,292m (after excluding EI of RM200m unrealised forex loss due to the USD-denominated shareholders’ loan for Pengerang and RM353m gain on deferred payable (related to payable amount for Pengerang utility costs which was further extended) was deemed below our expectation at 53%, but largely within consensus at 61%, of respective forecasts.

The main reason for us deeming it below expectations was due to the expectation of its 50%-owned Pengerang Integrated Complex (PIC) seeing widening losses upon full commencement of operations by 2HFY24. It also declared a DPS of RM0.10/share.

YoY, 1HFY24 revenue grew by 4%, primarily due to the weakening of the MYR against the USD. However, the positive impact was partially offset by the olefin & derivatives (O&D) division, which recorded a lower plant utilisation rate of 91% compared to 96% a year ago due to higher plant maintenance activities. The fertiliser and methanol (F&M) division's topline also declined due to lower urea prices (-5% YoY), while plant utilisation remained largely comparable YoY. Core profit surged due to improved gross margins, driven by stronger methanol and specialist product spreads.

QoQ, revenue edged up slightly by 3% as overall plant utilisation increased to 89% from 87%, thanks to reduced statutory turn-around activities. Net profit declined slightly by 7% due to higher losses from JV & associates as a result of the recognition of some overhead costs with relation to PIC.

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

1. The ASEAN Bintulu fertiliser plant went offline unexpectedly in May 2024, but had since returned to normal operations. The group is planning a major plant turn-around for this facility in 4QCY24.

2. The PC Ethylene and Polyethylene Kertih plants will undergo statutory turnaround in 3QFY24, which will affect plant utilisation for the O&D division.

3. The Pengerang complex, co-owned by PCHEM and Saudi Aramco, is targeted to achieve full operations by 3QCY24. This could negatively impact the group’s bottom line as it will begin recognising finance and depreciation costs.

Outlook. Polyolefin prices have begun to recover, currently hovering slightly above USD1,000/MT. With the gradual recovery of the Chinese and European industrial economies, we expect polyolefin prices to be slightly stronger in FY25. On the other hand, urea prices are expected to range at USD320/MT, which is at its 8-year average price as the demand and supply gets into a balanced state globally, suggesting that its F&M division is likely to be stable YoY in FY25.

Forecasts. We cut FY24-25F earnings forecasts by 16% and 12%, respectively, after reflecting higher losses from PIC (RM300m loss in FY24F and RM250m loss in FY25F) upon achieving commercial operations.

Valuations. Our TP is cut to RM5.52 from (RM6.28) pegged to an unchanged 15x FY25F PER, in-line with the valuations of its 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 recovery of polyolefin prices supported by firm crude oil prices, (ii) recovery in its specialty chemicals division will be sustained in FY24 after a turnaround in FY23, and (iii) its superior margins vs. its peers due to a favourable cost structure. However, the upside to its share price is capped by impending full commercial operations of PIC which is likely to be in the red. Even after excluding the start-up losses from PIC, the FY24F earnings still imply a PER of c.15x, which is still at its 5-year historical average. Maintain MARKET PERFORM.

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

Source: Kenanga Research - 19 Aug 2024