• Keep NEUTRAL, new TP of MYR7.32 from MYR8.18, 5% upside with c.4% FY23F yield. We remain cautious in our outlook for Petronas Chemicals, especially on its fertiliser segment – given the lower gas prices and continuous oversupply amidst sluggish demand. Additionally, Pengerang Integrated Complex (PIC) may incur start-up losses in 2H23, before achieving optimal utilisation.

• Unexciting petrochemical price outlook. Overall, olefin and derivative (O&D) prices have recovered from the lows recorded in 4Q22, on the back of a demand recovery and balanced supply, as well as a pick-up in restocking activities. On the flip side, fertiliser prices are expected to remain soft amidst weaker demand and oversupply following the downtrend in gas prices. The outlook for its specialty chemicals arm will likely remain challenging in 1H23, but management has guided that this may improve in 2H23. We believe 1Q23 numbers may still be rather weak (4Q22 core profit: MYR954m) as any rebound in O&D prices is likely to be offset by continuous weakness in the fertiliser and methanol (F&M) division.

• PIC update. PCHEM’s 50%-owned petrochemical plants in PIC have started operating and are currently undergoing test runs. PCHEM aims to commercialise the plants in 3Q23, and could achieve average 60-70% utilisation by year-end. With that, we believe PIC may incur slight losses, or break even at best – if it achieves the guided first-year utilisation rate of 60%. Meanwhile, additional competition may surface in the medium term. It was recently reported that ChemOne’s (a petrochemical player based in Singapore) Pengerang Energy Complex (PEC) is expected to achieve final investment decision by 2H23 and be fully operational by 2026. According to ICIS, PEC will be capable of processing 150,000 bbl/day of condensate – which will, in turn, produce 2.3m tpa of aromatics, 3.9m tpa of energy products and 50,000 tpa of hydrogen.

• Lower net cash position but new projects lining up. We expect the average ex-PIC plant utilisation rate for 2023 to be higher, at 90-91% (FY22: 89%). Management guided for two plant turnarounds (PTAs) (PC Ammonia and PC MTBE) and six pitstops scheduled in 2023 (vs PTAs and 2 pitstops in 2022). PCHEM’s net cash position fell by 56% to MYR6.2bn as of end- FY22 following the acquisition of Perstorp, but there are still some new projects (four basic chemical and two specialty chemical projects in 2023- 24) lining up, with capex guided at MYR1.5-2bn pa. Earnings contributions from these projects may not be significant.

• We cut FY23-25F earnings by 5-7% after lowering our estimated F&M contribution. Our TP also drops to MYR7.32 from MYR8.18, post ascribing a lower EV/EBITDA of 6.5x (-1SD of 5-year mean) from 7x, to account for the unexciting market outlook.

Source: RHB Research - 29 Mar 2023