Petronas Chemicals (PCHEM) released its fourth quarter results yesterday, boasting a higher operating profit than expected and reaffirming Macquarie Equities Research’s (MQ Research) view that earnings recovery should continue. MQ Research maintains Outperform on PCHEM and raises its target price.

The shares closed at RM7.50 (-0.7%) yesterday, 11.8% higher month-to-date and 0.9% higher year-to-date on the back of weaker performance in January. Investors who are keen to gain leveraged exposure to PCHEM may consider call warrant PCHEM-C54, which has an exercise price of RM7.70.

4Q20 Results

• PCHEM’s better-than-expected 4Q20 results reaffirmed MQ Research’s view that the earnings recovery should continue. With increased confidence in the 2021 outlook, MQ Research raises FY21/22E operating profit (OP) by 12%/13% and MQ Research’s target price (TP) to RM8.80 (from RM8.10).

Impact

• A more upbeat tone on FY21 outlook after tough 2020: PCHEM’s 4Q20 OP came in at RM796bn (+111% YoY, +68% quarter-on-quarter (QoQ)), beating both MQ Research’s estimate and Visible Alpha consensus by a big margin mainly due to stronger-than expected average selling prices (ASP) and higher sales volume in fertilizer and methanol (Link 1, 2 and 3). Looking forward, thanks to improved demand and reduced supply on unexpected outages and maintenance shutdown, management guided a more constructive view on the FY21 outlook.
• PIC-PETCHEM growth project at 100% completion: While the Street’s focus has been on PIC-PCHEM’s higher cost for polyethylene (PE), the new oil cracker allows PCHEM to have various non-PE plastics for electric vehicles’ (EV) lightweight materials, safe drinking and medicines. These products are rarely produced in a gas cracker. Plus, in 1Q20, there was a notable rebound in polyester chain products for apparels including MEG (QTD+34%), one of PIC-PETCHEM products. MQ Research estimates the project to add an average of RM480mn pa (= 22% of 2020E) through the cycle, once it fully ramps up.
• A greater commitment to environmental, social and governance (ESG); a higher payout: Throughout the conference call, PCHEM’s new Chief Financial Officer (CFO) shared a refined sustainability strategy including its carbon emission reduction plan and usage of waste recycling. Management also declared the highest dividend payout of 59% with the 2nd interim dividend per share (DPS) of 7 sen (vs. MQ Research’s estimate of 4 sen). MQ Research thinks PCHEM’s positive ESG attributes eventually point to a more sustainable dividend payout over time.

Earnings and Target Price Revision

• MQ Research raises FY20-22E OP by 12%~13% on a faster rise in ASP amid a demand recovery. On MQ Research’s change in earnings, it raises its TP to RM8.80 (from RM8.10).

Price and Catalyst

• 12-month price target: RM8.80 based on a Residual Income Model.
• Catalyst: Ongoing recovery in ASP; a sequential rise in OP; higher oil prices

Action and Recommendation

• Outperform. MQ Research thinks PCHEM is gaining investor attention particularly amid higher oil prices, given its input costs are largely fixed on long-term gas price contracts. Further, PCHEM’s ESG conscious steps should eventually drive valuations higher, in MQ Research’s view.

12-month Target Price Methodology

• PCHEM MK: RM8.80 based on a Residual Income Model methodology

Source: Macquarie Research - 24 Feb 2021