Review

• Petronas Chemicals Group’s (Pet Chem) 9M19 core profit of RM2.3bn (- 42% YTD) was below expectations, accounting for 59%/65% of our fullyear forecasts and consensus’ estimates. The shortfall versus our forecast was largely due to lower-than-expected product spreads, sales volumes and associate contribution.

• QoQ bottomline dipped by 58%, mainly due to: (1) product price rout for olefins and methanol led to margin compression, and (2) plunge in sales volumes due to statutory plant turnaround (TA) activities.

• Plant utilization in 3Q19 dropped to 81% (2Q19: 100%) on the back of shutdowns at: (1) ethylene cracker (capacity: 400k tpa) and its related downstream plants for estimated 50 days, and (2) PC Fertilizer Sabah (formerly known as SAMUR).

• YTD weakness was underpinned by prevailing trends since 1H19, comprising: (1) margin squeeze from weak ASPs, (2) associates turned loss making, (3) higher opex from increased plant TA activities. Nevertheless, lower taxes and a weaker MYR versus USD partially cushioned bottomline decline.

Impact

• On account of actual 3Q19 results, we tweak the following assumptions in our forecasts: (1) lowered product price for methanol by 31%, (2) increased olefins feedstock cost by an average of 63%, and (3) slashed associates’ contribution to loss of RM62mn (previous: RM118mn profit). As a result, our FY19-21 forecasts are lowered by 22%-26%.

Valuation

• Weakness in product spreads will unlikely reverse in the near-to-medium term unless US concludes multi-phase trade agreements with China that leads to normalization of global economic growth. Until then, petrochemicals demand - which largely emanates from China, will likely remain tepid. Accordingly, this is reflected in weak China PMI readings - which dipped below the confidence threshold since a year ago.

• Our target price (TP) for Pet Chem is reduced to RM7.50 (previous: RM8.70) following the cut in our forecasts. This is based on unchanged CY20 9x EV/EBITDA. Correspondingly, we downgrade our recommendation on Pet Chem to Sell (previous: Buy).

Source: TA Research - 14 Nov 2019