KEY INVESTMENT HIGHLIGHTS

• Petronas Chemicals Group Bhd’s 4QFY19 core profit of RM340.0m came in below expectations

• Revenue and earnings impacted by unplanned plant shutdown and subdued product prices due to weak crude oil price

• Differentiated and specialized products to cushion the impact from subdued product prices

• FY20F earnings revised down by -17.9%

• Maintain BUY with a lower TP of RM6.75 per share

4QFY19 earnings below expectations. Petronas Chemicals Group Bhd’s (PChem) 4QFY19 core earnings came in at RM340.0m. This brings its FY19 cumulative earnings to RM2,815.0m which was below our and consensus’ expectations at 77.5% and 84.2% respectively. Comparing against 4QFY18, revenue and earnings during the quarter contracted by -16.4%yoy and -73.5%qoq mainly due to the unplanned shutdown of its PC Methanol Plant 2 during the quarter coupled with soft product prices. Meanwhile on a quarterly sequential basis, revenue grew by +15.4%qoq due to higher sales volume vs 3QFY19 however, earnings dipped by -38.5%qoq due to the weak product prices. Average product prices were down by -19%yoy and -21%qoq during the quarter.

Overall PUR of 89% recorded in 4QFY19. The dip in PChem’s revenue and earnings during the quarter were due to several reasons. Firstly, there was an unplanned plant shutdown that took place during the quarter at its PC Methanol Plant 2 which resulted in lower production volume. Secondly, the subdued product prices during the quarter mainly due to the weak movement of crude oil price and last but not least, the strengthening of Ringgit during the quarter.

Olefins and Derivatives. The segment reported a lower PUR rate of 98% (vs 100% in 4QFY18) during the quarter due to higher maintenance activities. As a result, sales volume was lower in-line with the lower production which resulted in revenue and earnings declining by -27.9%yoy and -69.9%yoy respectively. Furthermore, the segment’s average product prices were lower due to the market being amply supplied and the soft movement of the crude oil price during the quarter.

Fertilisers and Methanol. The segment recorded a lower PUR of 83% during the quarter vs 89% in the same period last year mainly due to unplanned shutdown at its PC Methanol Plant 2 which lasted for 21days. This has resulted in lower production during the quarter. However; sales volume was higher due to product drawdown from inventory. Furthermore, the higher sales volume was negated also by the subdued product prices with revenue and earnings registering a decline of -22.1%yoy and -37.2%yoy respectively.

Coronavirus to cause disruptions to petrochemicals supply and demand from China. The recent outbreak of Coronavirus (Covid-19) in China has since spread to various countries across the world. This has caused major delays and shutdowns of business operations in several provinces in China including at the epicenter of the virus which is the Hubei Province. The prolonged Lunar New Year holiday that took place since late-January had further exacerbated the situation with disruptions at various petrochemical plants in China. This includes Sinopeck-SK Wuhan Petrochemical which had lowered the operating rate of its 800kta cracker by 10% recently. Its 300kts cracker expansion which is scheduled for completion in July has also been delayed.

While some of the businesses have gradually re-opened, many of the cities are still in lockdown which reduces not only traveling and working activities but also the consumer spending activities significantly. Correspondingly, the consumption of commodities as well as disposable packaging has declined with the weak consumer spending activities which resulted in lower demand for petrochemicals. Refer to Figure 1 below. As the outbreak currently showing no immediate signs of abating, we are of the opinion that the outbreak might last the entire 1QFY20. Hence, we opine that the supply-demand dynamics of the petrochemicals market will result in continued pressure on the average selling prices across the petrochemicals value chain especially on the olefins and derivatives.

Source: MIDF Research - 27 Feb 2020