PETRONAS Chemicals – Underappreciated Opportunities

Date: 
2021-07-21
Firm: 
MACQUARIE GROUP
Stock: 
Price Target: 
9.80
Price Call: 
BUY
Last Price: 
8.64
Upside/Downside: 
+1.16 (13.43%)

Macquarie Equities Research (MQ Research) raised PETRONAS Chemicals’ (PCHEM) target price to RM9.80, which is 22.5% higher than Monday’s closing price as a result of an increased FY21/FY22E’s projected net profit by 64%/23%. MQ Research thinks that the Street underestimates PCHEM’s earnings power, projecting PCHEM’s 2Q21E operating profit at RM1.29mil, while explaining that the latest share price correction is mainly due to container shortages.

Stronger-than-expected Outlook

  • MQ Research thinks the Street still underestimates PCHEM’s earnings power; outperformance (YTD +11% vs. KLCI of -7%) is likely to continue.

Global supply disruption; and China’s decarbonization

  • Plastics seeing global supply disruption: MQ Research is projecting 2Q21E operating profit (OP) of RM1,288mil, which is 37% above Visible Alpha consensus; without lockdown, 2Q21E OP would be higher. While the Street seems to be taking the latest chemical price correction as a sign of margin peaking based on traditional cyclicality, MQ Research attributes it mainly to container shortages. Due to extremely high container freight rates on routes from China, China cannot export, thus North-East Asian demand is relatively low vs the shortages seen in the West. While PCHEM is not fully immune to the global plastics supply disruption, thanks to South East Asia’s tight supply disruption situation, MQ Research expects PCHEM to capture relatively higher prices within the Asian region, while benefiting from structural demand growth for high performance chemicals (=plastics) for electric vehicles, solar systems, etc.
  • No major supply growth for remainder of 2021E within the region: MQ Research expects a rise in demand across a wider range of plastic products as vaccinated consumers venture out and spend stimulus checks, although growth is now slowing back to a normal pace from the easy snapback gains from the COVID recession. But the three key crackers (GS Caltex, LG Chem, Zhejiang PC) in Asia have already started production. The remaining 4m tpa of new capacity shouldn’t affect the Asian market, this year.
  • Fertilizer shortages loom amidst China’s decarbonization: China’s environmental crackdown and supply constraints are resulting in a rise in coal prices and, in turn, its downstream methanol and urea prices. In addition, MQ Research expects an unprecedented series of unplanned ammonia plant shutdowns to support a rally in ammonia prices for an extended period.

Earnings and Target Price Revision

  • Raise FY21/FY22E NP 64%/23% on stronger average selling prices (ASPs). Due to earnings changes, MQ Research raises target price to RM9.80 (implied target 12fw P/B of 2.1x) from RM8.80.

Price Catalyst

  • 12-month price target: RM9.80 based on a Residual Income Model (RIM).
  • Catalyst: A rise in ASP; consensus beating results; specialty products business developments.

Action and Recommendation

  • Outperform.

12-month Target Price Methodology

  • PCHEM MK: RM9.80 based on an RIM methodology

Source: Macquarie Research - 21 Jul 2021

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