• Keep BUY and MYR12.21 TP, 22% upside and c.4% FY22F yield. Petronas Chemicals booked another solid quarterly earnings in 1Q22 (+52% YoY), anchored by better numbers from the fertilisers & methanol (F&M) division. The long-awaited Pengerang Integrated Complex (PIC) kickstarted in May, while the petrochemical plant will follow suit in phases. Near-term earnings should be solid, and its valuation remains attractive (below 5-year mean) – even with the ASP moderation anticipated – in line with our crude oil forecasts.

• Within expectations. 1Q22 core earnings of MYR2.0bn (+52% YoY) came in within expectations at 28% and 29% of our and Street full-year estimates. No dividend was declared, as expected.

• 1Q22 core earnings dropped 6% QoQ to MYR2.0bn after stripping off a MYR30m FX gain and MYR21m inventory write-back. The weaker performance was due to lower JV & associate profit (-29%) and higher tax expenses (41%). Note that despite olefin and derivative revenue fell 19% QoQ on lower plant utilisation of 75% (4Q21: 101%), its segmental EBITDA still improved by 14% on stronger blended product margin offsetting the weaker F&M EBITDA (-14%) as a result of higher maintenance costs. YoY, 1Q22 core earnings also surged 52% YoY, mainly on stronger F&M ASPs and margin.

• Outlook. The petrochemical plant at Pengerang is expected to commence operations in phases following the PIC start-up in early May. Management is targeting the plant to achieve 50-60% utilisation in 2H22 and subsequently ramp up to the optimal level of 90% in 2023. We believe the plant will record minimal losses in 2H22 during the ramp-up phase. PCHEM’s average plant utilisation rate guidance ex-PIC for 2022 remains at >90%, with the remaining two scheduled plant turnaround to be completed by 2Q22. Overall petrochemical prices should remain elevated amidst geopolitical uncertainties and high gas prices. Meanwhile, the MYR7bn Perstorp acquisition will enable PCHEM to strengthen its petrochemicals portfolio and selectively diversify into derivatives and specialty chemicals. The transaction is slated for completion by 2H22 – pending shareholder approval at an EGM and anti-trust clearances in certain jurisdictions. Post-acquisition, the company is still estimated to remain at a net cash level of c.MYR7bn (end FY21: MYR14bn).

• We maintain our earnings estimates and TP at MYR12.21, pegged to an unchanged 9x FY23F EV/EBITDA, ie its 5-year mean. We have also incorporated a 2% ESG premium based on an ESG score of 3.1. Downside risks: Weaker-than-expected petrochemical prices and plant utilisation rates.

Source: RHB Research - 30 May 2022