Review

• Petronas Chemicals Group Bhd’s (PCHEM) 1QFY24 results came in below expectations at 16% and 18% of our and consensus’ full-year forecasts respectively. The negative variance was largely due to weak product prices as demand remains languished.

• 1QFY24 core profit plunged 29.1% YoY due to lower sales volume and sluggish product spreads.

• Olefin and Derivatives (O&D): Segment turned from LBITDA of RM67mn in 4QFY23 to EBITDA of RM398mn in 1QFY24 on the back of lower operating expenses such as maintenance costs and utilities costs. Recap that various maintenance activities were carried out in 4QFY23.

• Fertilisers and Methanol (F&M): 1QFY24 EBITDA dropped 6.5% QoQ dragged by lower sales volume (-11.3% QoQ) and sluggish product spreads. Urea sales were down 33.4% QoQ due to turnaround at PC Fertiliser Kedah and unplanned shutdown at Asean Bintulu Fertiliser (ABF) to repair breakdown caused by two of the major equipment.

• Specialties: 1QFY24 EBITDA soared more than 20-fold supported by higher sales volumes from restocking activities and margin expansion from lower raw materials costs. Notably, sales for automotive and consumer goods segments have returned to pre-pandemic levels.

Key Takeaways From Conference Call

• Pengerang Integrated Complex (PIC) registered a low single digit LBITDA in 1QFY24, slightly lower than 8mn LBITDA in 4QFY23. There are a few more performance test runs (PTR) expected this quarter and the scheduled commercial operational date (COD) is in 2H2024. Once commercially operational, depreciation (c.RM400mn per annum) and the capitalised interest expense are expected to kick in. We expect PIC to experience losses at COD from depreciation and interest expenses but should improve once the utilisation rate increases. It may be difficult for PIC to be profitable as naphtha-based plants have higher costs than gas-based plants.

• Several turnarounds are scheduled for the remainder of the year, including PC Methanol I in June, PC Ethylene and PC Polyethylene in 3QFY24 and ABF in 4QFY24.

• Recap that PCHEM has been granted the extension for the existing ethane and propane supply contract for one of its crackers until the end of 2024 while the negotiation for a longer-term contract is ongoing. The group is still negotiating with Petronas and hopes that the existing terms and conditions can be maintained.

Impact

• We slash our FY24/FY25/FY26 earnings forecasts by 26.4%/32.9%/45.4% respectively after lowering our ASP assumptions.

Outlook

• Olefin and Derivatives (O&D): Ethylene and MEG prices are expected to be supported in the near-term by seasonal cracker turnaround and maintenance activities. However, capacity additions loom large on the Asian polyethylene (PE) markets, posing challenges to market balance and oversupply. China is poised for c.7.5mn tonnes of PE capacity addition in 2024, with a further 6.7mn tonnes slated for 2025. As a comparison, ICIS forecasts that global PE demand will grow by 3.4m tonnes per year in 2024- 2040. Recovery of product spread seems unlikely if China continues its massive capacity expansion.

• Fertilisers and Methanol (F&M): Outlook is softening in the near term amidst delayed planting season due to hot weather and ample methanol supply from Middle East.

Valuation

• Following the change in our earnings forecasts, we lower our TP to RM7.15/share (previous: RM7.45/share) pegged to 9x CY25 EV/EBITDA. Maintain Hold.

Source: TA Research - 30 May 2024