Macquarie Equities Research (MQ Research) cut Petronas Chemical’s (PCHEM) 20/21E operating profit (OP) by 33%/15% while raising FYE22 OP by 5% and reduced its target price to RM6.80 from RM7.50. In its report (4 Sept), MQ Research shares its view that PCHEM’s latest share losses on weaker 1H20 present a buying opportunity with a better outlook in the mid- to long-run in the petrochemical industry. PCHEM’s Outperform rating is maintained.

Key Points

• The latest share losses on weaker 1H results present a buying opportunity
• MQ Research expects chemicals to eventually emerge stronger as the oil war and COVID delay a second wave of planned big projects
• MQ Research cuts 20/21E OP by 33%/15%, while raising FY22E OP by 5%. MQ Research lowers its TP to RM6.80 from RM7.50. Outperform.

Event

• MQ Research expects the latest headwinds to eventually improve mid-to long-term returns.

Impact

• Short-term softer: MQ Research overestimated PCHEM’s OP for 1H20. Despite resilience in key product prices, PCHEM’s sales volume has been greatly affected by the lockdown which was against MQ Research’s estimate that the company could have redirected some of its products to China. 2020 demand dips well below the average of the prior four to five years. Although MQ Research continues to see April likely being the bottom in terms of demand, the pace of recovery would be slower in the near term.

• Better outlook in the mid- to long-run: Having said that, MQ Research sees an increasing number of planned projects are delayed or cancelled. Besides Middle Eastern companies’ capex cut amidst oil market uncertainties, a rise in gas costs is resulting in an unprecedentedly low profitability of petrochemical products, delaying a second wave of new capacity additions in the US. The oil war and COVID are slowing down US oil production, and so did the supply of gas, given the majority of the US gas comes from oil wells. Per IHS, US gas supply tightness should deepen into 2021, which would cause cutbacks on US petrochemical supply as well, in MQ Research’s view. MQ Research estimates ~30% of global planned projects during 2020-2023 to be delayed or cancelled, eventually lifting mid- to long-term margins as well as advancing a meaningful turnaround in the petrochemical industry by one year to 2022.

• Increased visibility on specialty chemicals segment: On Aug. 24, PCHEM announced it would build a new joint venture (JV) producing nitrile butadiene (NB) Latex, a raw material of medical gloves by utilizing butadiene from its PIC-PCHEM project. Assuming PCHEM takes a 50% stake in the JV, it could add an OP of RM128mn pa (4% of 2021E OP) at a full rate in 2023. Amidst slowing growth in global demand, MQ Research sees rising importance of growing specialty chemicals.

Earnings and Target Price Revision

• MQ Research cuts FY20/21E OP by 33%/15%, while lifting FY22E OP by 5%. Target price is lowered to RM6.80 (from RM7.50).

Price Catalyst

• 12-month price target: RM6.80 based on a Residual Income Model.
• Catalyst: Potentially ongoing recovery in average selling price (ASP); a sequential rise in OP

Action and Recommendation

• Maintain Outperform.

Source: Macquarie Research - 7 Sept 2020