Petronas Chemical (PCHEM) recently reported a 54% decline in its net profit for the third quarter ended 30 September 2019 (3Q19). Despite the disappointing result, Macquarie Equities Research (MQ Research) maintains an Outperform rating on PCHEM due to the company’s optimism on the revenue growth for the next quarter, among others. MQ Research also provides further justification on its positive sentiments towards PCHEM.

Event

• On Nov 14, after market, PCHEM held a conference call on its weak set of 3Q19 results.

Impact

• 3Q19 results – disappointing, but not as bad it looks without one-offs. PCHEM’s 3Q19 operating profit (OP) came in at RM653mn, missing MQ Research’s estimates by a big margin. Having said that, without ~RM320mn of one-offs (bigger-than-expected maintenance expense of RM267mn; and inventory loss of RM53mn), OP would’ve been RM973mn vs. MQ Research estimate of RM1,083mn. In 3Q19, MQ Research noticed PCHEM’s group utilization ratio dropped to 81% (vs. 103% in 2Q19) due to heavier-than-expected maintenance shutdown. MQ Research reflected only 50 days of the Group’s ethylene cracker (capacity: 400k tpa) and its related downstream plants in our model. But, the actual results tell that PC Fertilizer Sabah (formerly known as SAMUR) was also taken out due to maintenance in 3Q19. Looking at 4Q19, the company guides that revenue growth will improve, as no major maintenance shutdown is planned.

• Close to the cyclical bottom: Besides a potential recovery in sales volume, MQ Research sees some positive signs into 2020. It is true that more supplies are planned in the region (Hengli, Zhejiang and etc.). But, considering the current cyclical bottom level of cash margins, this doesn’t point to any meaningful downside to chemical margins, in MQ Research’s view, though the price increase could be capped with potential supply growth. This implies the likelihood of year-on-year (YoY) earnings growth of companies including PCHEM which incurred one-offs this year and or have bottom-up growth plans into 2020. In fact, MQ Research sees the PIC PETCHEM (RAPID = PCHEM’s growth project) related product margins are turning more favourable to PCHEM: Polyethylene-ethylene margins are firm; and monoethylene glycol (MEG) rebounded from its latest low. As well, the latest recovery in ammonia (one of key fertilizer products) prices is notable.

Action and Recommendation

• Maintain Outperform. As MQ Research believes the global economy should find a cyclical bottom from 2H19 lows, MQ Research recommends investors look past the weak 3Q and take positions ahead of China’s Level 3 stimulus and, in turn, a potential recovery in both sales volume and average selling price from 4Q19 onwards.

12-month Target Price Methodology

• PCHEM MK: RM8.50 based on total shareholder return methodology

Source: Macquarie Research - 15 Nov 2019