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Keep NEUTRAL, with new MYR8.18 TP from MYR9.40, 5% upside. China’s re-opening is expected to provide support in the near term to the overall petrochemical market while specialty chemicals outlook is likely to remain challenging in 1H23. Near-term catalyst, in our view, is lacking, especially when the upcoming ethane feedstock supply agreement renewal is due in mid-2023, coupled with the commercial operation date (COD) of the petrochemical plants in Pengerang being further delayed to 3Q23.
Within our, but miss consensus expectations. FY22 core earnings of MYR6.5bn (-11% YoY) came in within our, but missed consensus expectations, at 95% and 87% of our and Street full-year estimates. A second interim DPS of 16 sen was declared, bringing FY22 DPS to 41 sen (FY21: 56 sen).
4Q22 revenue increased by 24% QoQ on the back of stronger production and sales volume amidst higher plant utilisation of 100% (from 3Q22’s 94%), coupled with the Perstrop contribution. However, core earnings plunged 46% QoQ on compressed margins (mainly olefins and derivatives (O&D) led) to MYR954m as well as lower JV & associate contribution. Cumulatively, FY22 core earnings declined by 11% YoY, mainly on weaker O&D contribution (-24%, lower sales volume), masking the stronger fertilisers & methanol (F&M) numbers (+12%, higher product prices).
Outlook. A new reportable segment “Specialties” has commenced effective 4Q22 following the completion of Perstorp in October last year. Management guided that the COD of petrochemical plants in Pengerang is further delayed to 3Q23 with the ongoing testing process. Meanwhile, we expect the average ex-PIC plant utilisation rate for 2023 to be higher at 90- 91% (FY22: 89%). Overall, China’s re-opening is likely to provide modest support to O&D prices, with F&M prices to remain soft on oversupply amid the off-planting season. Specialty chemicals outlook is likely to remain challenging in 1H23 but is guided to have some improvement in 2H23. Being one of the key feedstocks, PCHEM’s ethane supply agreement with Petronas is up for renewal by this year. Note that the other ethane supply contract was renewed for another 20 years from end of 2016 till 2036.
We cut our FY23F-24F earnings by 14% on weaker margins while incorporating Perstorp numbers. Our TP is lowered to MYR8.18, pegged to an unchanged 7x FY23F EV/EBITDA, ie -1SD from 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.
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