KEY INVESTMENT HIGHLIGHTS

• Petronas Chemicals Group Bhd’s 3QFY20 core profit of RM471.0m came in below expectations
• Revenue and earnings boosted by improved product prices and sales volume with global easing of Covid-19 restrictions
• Gradual recovery in ASPs and demand in FY21 to drive earnings in FY21F
• FY20F earnings revised down by -13.6% to RM1,589m
• Maintain NEUTRAL with an unchanged TP of RM5.85/share

PChem’s 3QFY20 earnings recovered alongside product prices and sales volume. Petronas Chemicals Group Bhd’s (PChem) recorded an improved 3QFY20 earnings at RM471.0m which was in-line with the recovery in oil price and gradual easing of Covid-19 restrictions worldwide. This brought its 9MFY20 cumulative earnings to RM1,163.0 which was below our and consensus’ expectations at 63% and 60% respectively. When compared against 3QFY19, revenue declined slightly by -5.8%yoy whilst earnings decreased by -14.8%yoy respectively. This was primarily due to lower year-over-year sales volume recorded by - 3.0% following the continued restriction in demand arising from the worldwide Covid-19 health crisis coupled with soft product prices from the low crude oil price.

Meaningful quarterly rebound post-MCO. Despite registering cumulative earnings below our expectations, sales volume and average selling prices (ASPs) have definitely improved quarter-over-quarter which helped to boost earnings during the quarter. On a quarterly sequential basis; revenue grew by +8.8%qoq whilst earnings surged by +153.2%qoq respectively mainly due to improved product prices, and sales volume recorded during the quarter. Average blended product prices were up by +19.5%qoq during the quarter.

Commendable overall PUR of 90% recorded in 3QFY20. Overall plant utilisation rate (PUR) of 90% was recorded in 3QFY20, which was higher when compared against 3QFY19’s PUR of 81%. This is due to lower turnaround (TA) activities undertaken during the quarter. That said, its PUR was impacted by the 20days closure of its PC Methanol and PC Fertiliser Sabah due to the landslide incident at the Sabah Sarawak Gas Pipeline (SSGP) which affected its feedstock supply during the quarter.

Olefins and Derivatives. The segment reported a 100% PUR during the quarter which is higher than 3QFY19 due to lower statutory TA activities undertaken during the quarter. During the quarter, revenue was lower by -12.1%yoy due to soft product prices. That said, the segment’s profit grew by +11.2%yoy to RM258.0m following improved sales volume which was driven by its high production volume of 1,005,000MT during the quarter.

Fertilisers and Methanol. The segment recorded a PUR of 84% during the quarter vs 83% in the same period last year mainly due to the 20 days shutdown of its PC Methanol and PC Fertiliser Sabah landslide incident which impacted the feedstock supply to both plants during the quarter. This has resulted in lower production volume during the quarter of 1,556,000MT vs 1,836,000MT in 2QFY20. That said, sales volume was comparable with 3QFY19. As a result, the segment recorded a -10.0%yoy decline in revenue during the quarter. However, earnings managed to grow marginally by +2.5%yoy.

FY20F earnings revised downwards, FY21F earnings maintained. We opine that our previous FY20F earnings estimate was rather bullish given that we are now expecting: (i) demand recovery to remain fragile following elevated new cases of Covid-19 reported worldwide of late; (ii) crude oil price to continue trading sideways into FY21 and; (iii) limited shipping/delivery options to be available due to prolonged Covid-19 restrictions to impact PChem’s operation in 4QFY20. Hence, we are reducing our FY20F earnings by -13.6% to RM1,589m (from RM1,840m previously).

However, we are maintaining our FY21F earnings at this juncture given that another year of heavy TA activities is expected in FY21F with five (5) TA scheduled to take place so far next year.

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 an unchanged EPS21 of 39.0sen.

Maintain NEUTRAL with POSITIVE bias. We are maintaining our NEUTRAL recommendation on PChem at this juncture given that we foresee the recovery for both product prices and demand to remain highly reliant on the movement of the crude the oil price – which remains highly susceptible to the global Covid-19 development. Furthermore, we are expecting the crude oil price to continue trading sideways for the rest of the year which could weigh on 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 it has consistently managed to find home for its products which has translated to the recovery it has experienced in the third quarter.

Additionally, with the commissioning of RAPID Pengerang slated to take place 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 5.6% FY21F as of yesterday’s closing price.

Source: MIDF Research - 19 Nov 2020