Petronas Chemicals posted a record-high operating profit (OP) and dividend for the second quarter ended 30 June 2021 (2Q21), as its fertilizers and high-performance chemicals segments shine on the back of higher-than-expected average selling prices. Its OP of RM1.8bn represents a six-fold increase over the same period in 2020. Macquarie Equities Research (MQ Research) said the company has a solid outlook as eco-friendly customers spur demand for high-performance chemicals and maintains Outperform on this stock with its target price maintained at RM9.80. Petronas Chemicals shares rose 2.6% yesterday to close at RM8.15. Bullish investors may consider call warrants PCHEM-C64 and PCHEM-C65, with exercise prices of RM9.88 and RM8.38, respectively.
Record-high OP and Dividend in 2Q21
- Petronas Chemical’s 2Q21 OP not only beat MQ Research’s above-consensus estimate by 41%, but it also hit record quarterly profit. Its OP of RM1.8bn represents around a 6-fold increase over the same period in 2020. The interim dividend also rose to 23 sen per share vs. 5 sen per share a year ago.
Solid Outlook Ahead
- What MQ Research liked: Higher-than-expected average selling prices (ASP) boosted 2Q results. In particular, the price of ammonia, one of the key fertilizer-related products, has almost doubled quarter-on-quarter (QoQ). Fertilizer prices are rallying as vaccine rollouts aid a demand recovery, but China’s carbon-neutral target is reining in supply. Looking at the below-the-line items, profits from joint ventures (JV) surged to RM167mn in 2Q (from a RM30mn loss a year ago), largely surpassing MQ Research’s bullish estimate. Its JVs, including BASF Petronas Chemicals, produce plasticizers and additives that are used to improve the performance of plastics. As MQ Research sees structural demand growth for high performance chemicals (=plastics) for electric vehicles (EV), solar systems, electronic appliances etc., MQ Research sees a potential that earnings contribution from its JVs should continue to surprise the market on the upside and result in higher-than-expected dividend per share (DPS).
- What could have been better: Without maintenance shutdowns and, in turn, a drop in sales volume (-4% year-on-year (YoY)), its profit would have been even higher. In 2Q, the company’s utilization ratio dropped to 97% (vs. 100% in the same period of the last year); management guided no planned outages in 3Q.
- What was interesting: Against the Street’s slowdown expectations, management guided a solid 3Q outlook, expecting 3Q to be, at least, similarly strong when compared with 2Q. Management was bullish on O&D (olefin and derivatives, polyethylene and polypropylene); demand to improve ahead of China’s golden week holidays in October, with no major supply growth for the remainder of 2021E within the region amidst a global supply disruption.
Earnings and Target Price Revision
- Raise FY21/FY22/FY23E OP by 17%/10%/9% mainly on a higher-than-expected ASPs. No change to MQ Research’s target price.
Price Catalyst
- 12-month price target: RM9.80 based on a Residual Income Model.
- Catalyst: A rise in ASP; consensus beating results; specialty business developments
Action and Recommendation
12-month Target Price Methodology
- PCHEM MK: RM9.80 based on a Residual Income Model methodology
Source: Macquarie Research - 26 Aug 2021