KEY INVESTMENT HIGHLIGHTS

• Petronas Chemicals Group Bhd’s 2QFY20 core profit of RM186.0m came in below expectations

• Revenue and earnings impacted by weak product prices and lower sales volume arising from the Covid19

• Gradual recovery in ASPs and demand expected in FY20

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

• FY20F earnings revised down by -28.7% to RM1,840m

• Maintain NEUTRAL with an unchanged TP of RM5.85/share

PChem’s 2QFY20 earnings impacted by low product prices and lower sales volume. Petronas Chemicals Group Bhd’s (PChem) 2QFY20 earnings came in at RM186.0m. This brings its 1HFY20 cumulative earnings to RM692.0 which was below our and consensus’ expectations at 27% and 25% respectively. Comparing against 2QFY19, revenue and earnings during the quarter contracted by -26.7%yoy and - 83.4%yoy primarily due to lower sales volume (-3.0%yoy) following the Covid-19 health crisis coupled with soft product prices arising from the plunge in crude oil price in April 2020. Meanwhile on quarterly sequential basis, revenue and earnings dipped by -18.3%qoq and -63.2%qoq respectively mainly due to weak product prices despite the better overall PUR quarter-over-quarter. Average blended product prices were down by -23.9%yoy and -22.8%qoq during the quarter.

Commendable overall PUR of 97% recorded in 2QFY20. Overall plant utilisation rate (PUR) of 97% was recorded in 2QFY20, which was slightly lower when compared against 2QFY19’s PUR of 99%. This was due to the several turnaround (TA) maintenance activities that took place during the quarter especially on its fertiliser and methanol plant.

Olefins and Derivatives. The segment reported a close to 100% PUR at 98% during the quarter which is similar to 2QFY19. During the quarter, revenue was lower by -29.2%yoy and segment result plunged by -92.8%yoy coming from the persistently weak product prices despite commendable sales volume recorded during the quarter of 970,000MT. This was mainly due to compressed margin arising from the weak global product prices. During the quarter, the segment’s blended ASP dipped by -28.9%yoy and -28.0%qoq as the market was being amply supplied and product prices.

Fertilisers and Methanol. The segment recorded a comparable PUR of 101% during the quarter vs 107% in the same period last year mainly due to TAs undertaken at several of its plants notably at its PC Methanol Plant 2, PC Fertiliser Bintulu, Labuan and Kedah. This had resulted in lower production during the quarter. Furthermore, the higher sales volume was negated also by the subdued product prices with revenue and earnings registering a decline of -33.3%yoy and -71.0%yoy respectively during the quarter.

FY20F earnings revised downwards. After assessing the impact from: (i) slow demand recovery from the recent peak of Covid19 pandemic crisis; (ii) the potential continued sideways movement of the crude oil price; (iii) turnaround at its PC Methanol Plant 1, Asian Bintulu Fertiliser, PC Fertiliser Kedah in Gurun and MTBE Gebeng plant to be undertaken in 4QFY20 which will reduce sales volume as well as; (iv) slow recovery in product prices; we are reducing our FY20F earnings by -28.7% to RM1,840m (from RM2,851m previously).

Target Price unchanged at RM5.85. No changes were made to our target price at RM5.85 per share as we have pegged our valuation base year to FY21F. Our valuation is derived from pegging PER21 of 15x to a lower EPS21 of 39.0sen.

Maintain NEUTRAL with POSITIVE bias. We are maintaining our NEUTRAL recommendation on PChem at this juncture given that we foresee product prices recovery to be slow despite the recent improvement in the oil price. This is as we are expecting the crude oil price to continue trading sideways for the rest of the year which could limit the price recovery for petrochemical products - our in-house view is that oil price to continue trading between USD40-45pb. That said, we have a POSITIVE BIAS on the company given that its fundamentals remain intact and the demand from refineries in China and several regional countries have been encouraging. The recent trade data showed that crude and crude-related product export from Malaysia to China has improved by +52.8%mom in June; a jump from -17.7%mom in May 2020. In addition, the easing of Covid-19 measures and re-opening of economies worldwide is expected to translate to improved demand going forward. PChem also remains as one of the highly regarded producer of high quality fertilisers and methanol products which will see them benefitting from the improvement in product prices going forward.

Furthermore, with the full-commissioning of RAPID Pengerang slated to be in 1QFY21, we are expecting PChem to start moving towards producing more differentiated and specialized products starting with the commissioning of PC Isononanol in Pengerang. Furthermore, with the completion of its statutory TA activities, production volumes will be restored to pre-TA period and further ramp-up from Pengerang – which will be able to produce a wider product range (C2-C6) compared to Kerteh and Gebeng combined, will assist in arresting the impact from the subdued product prices if it lingers into next year. Dividend yield remains attractive at 6.1% FY21F as of Wednesday’s closing price.

Source: MIDF Research - 21 Aug 2020