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Downgrade to NEUTRAL from Buy, new MYR9.34 TP from MYR12.21, 7% upside with c.5% FY22F yield. Our downgrade is largely premised on the relatively cautious outlook for the petrochemicals market, amidst uncertain economic growth prospects and a vague earnings growth profile from Pengerang Integrated Complex (PIC). While we acknowledge the rationale for the acquisition of Perstorp – which will boost PCHEM’s petrochemicals portfolio and enable it to diversify into specialty chemicals – we are cautious over the sustainability of its record-high earnings.
Within expectations. 1H22 core earnings of MYR3.8bn (+18% YoY) are in line, at 56% and 49% of our and Street full-year estimates. A first interim DPS of 25 sen was declared (2Q21: 23 sen).
2Q22 core earnings dropped 13% QoQ to MYR1.8bn after stripping off a MYR163m FX gain and MY5R4m inventory write-down. The weaker numbers were due to lower sales and production volumes, which in turn stemmed from higher plant turnaround and unexpected maintenance activities – this dropped its plant utilisation rate to 72% (1Q22: 87%). Note that its olefin and derivative (O&D) EBITDA rose by 16% QoQ on a higher plant utilisation rate of 89% (1Q22: 75%). This was offset by a weaker EBITDA (-28% QoQ) from the fertilisers and methanol (F&M) unit, due to a lower plant utilisation of 62% (1Q22: 93%) as there were: i) Scheduled plant turnaround exercises at PC Fertilisers Sabah and PC Methanol, and ii) unexpected maintenance activities at ABF and PC Ammonia., 1H22 core earnings still grew by 18% YoY, mainly on stronger F&M numbers (+36%, higher product prices) masking the weaker O&D contribution (-8%, lower sales volume).
Outlook. The petrochemical plant at Pengerang should recognise minimal progressive revenue in the near term, with the bulk of costs and depreciation charges to be fully recognised upon commercialisation (targeted for December). The plant may only see 50-60% utilisation in 1H23, with a stronger ramp-up to optimal levels in 2H23. We were guided that the unexpected plant maintenance was resolved by July, and the average ex- PIC plant utilisation rate for 2022, in our view, may fall below the guided 90% (1H22: 79%) despite a strong ramp-up in 2H, without any scheduled plant turnaround. Overall O&D prices are down due to continuous lockdowns in China, and F&M prices have also retraced due to the off- planting season.
We maintain our earnings estimates, but cut our TP to MYR9.34, pegged to a lower 7x FY23F EV/EBITDA (from 9x), ie between -1SD and - 1.5SD from the 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.
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