Review

• Petronas Chemicals Group Bhd’s (PCHEM) 1HFY23 core profit of RM1.1bn (-69.8% YoY) came in below expectations, accounting for 18% and 34% of ours and consensus’ full-year forecasts respectively. The negative variance was largely due to lower-than-expected product spreads.

• The Group declared first interim dividend of 8sen/share (2QFY22: 25sen/share).

• Group: 1HFY23 revenue surged 11.0% YoY due to higher sales volume and the inclusion of contribution from recently acquired Perstorp Holding AB in Oct 2022. Plant utilisation (PU) rate was 89% (+10%-pts YoY) driven by absence of statutory turnaround or plant maintenance activities. Nonetheless, 1HFY23 PBT plunged 69.1% YoY on the back of lower product spreads. Sequentially, 2QFY23 revenue dropped 5.9% QoQ driven by lower sales volume and product prices. Despite lower revenue and lower product spreads, 2QFY23 PBT soared 17.6% QoQ mainly due to higher foreign exchange gain on revaluation of loan.

• Olefin and Derivatives (O&D): 1HFY23 revenue increased 16.7% YoY on the back of higher sales volume and strengthening of USD. PU was 96% compared with 82% in 1HFY22. However, EBITDA plunged 50.9% YoY driven by lower product spreads and higher electricity costs.

• Fertilisers and Methanol (F&M): 1HFY23 revenue dropped 30.2% YoY due to lower product prices. PU was 85% compared with 77% in 1HFY22. EBITDA plunged 48.2% YoY as a result of lower product spreads.

• Specialties: 1HFY23 revenue more than doubled due to inclusion of contribution from Perstorp. However, EBITDA plunged 61.0% YoY due to compressed margins and lower sales volume.

Impact

• We lower our FY23/FY24/FY25 earnings forecasts by 57.4%/34.0%/17.5% after raising our feedstock cost assumptions.

Outlook

• PCHEM anticipates that product prices for O&D will improve slightly, supported by restocking activities prior to China’s Golden Week holiday. Meanwhile, F&M product prices should stabilise amidst short supply in the region. As for specialties, the Group expects weaker sales and earnings development moving forward in view of slower industrial growth impacting demand.

• Overall, we expect margin to continue to be under pressure in 2HFY23 but product spread should improve in 2024.

Valuation

• We roll forward our base year to FY24. Following the cut in our earnings forecasts, our target price for PCHEM is reduced to RM7.40/share (previous: RM7.56/share) based on 8x CY24 EV/EBITDA (previous: 6.2x EV/EBITDA). We raise our valuation multiples as we believe the prices of petrochemical products have bottomed and stabilised. On the back of this, and given the higher upside potential, we upgrade our recommendation on PCHEM to Hold.

Source: TA Research - 23 Aug 2023