PCHEM registered a decent 3Q22 core net profit of RM1,787m (-3% QoQ, -8% YoY) and 9M22 sum of RM5,666m (+10% YoY). We deem the results to be above our expectations but within consensus at 85%/75% of ours/consensus full-year forecasts respectively. Our findings have indicated that product spreads (HDPE, LDPE, LLDPE, urea and methanol) have come off from their respective peaks in 1H22. In view of an imminent normalisation in product spreads, we believe that PCHEM’s profits will peak in FY22 and decline in FY23f. We advise investors to lock in profits and embrace the likely outcome of a petrochemical bear cycle in 2023. With that, we downgrade PCHEM to HOLD with a lower TP of RM9.20/share (from BUY – TP: RM11.76/share previously) – pegged to a multiple of 10.5x, which is in-line with the valuation of its global peers.

Above ours but within consensus. PCHEM registered a decent 3Q22 core net profit of RM1,787m (-3% QoQ, -8% YoY) and 9M22 sum of RM5,666m (+10% YoY) – after having adjusted for: (i) RM67m amortisation of deferred income; (ii) RM70m fair value gain; and (iii) RM37m on inventories written back to net realisable value. We deem the results to be above our expectations but within consensus at 85%/75% of ours/consensus full-year forecasts respectively. Key variance against our forecast was due to better-than-expected performance from its Fertiliser & Methanol segment – buoyed by higher production volumes throughout the quarter. However, our findings have indicated that product spreads (HDPE, LDPE, LLDPE, urea and methanol prices) have come off from its respective peaks in 1H22 – see Figures #1/2.

Dividend. No Dividends Were Declared in 3Q22.

QoQ. Core net profit dipped slightly by 3% QoQ respectively in 3Q22 mainly due to significantly lower product spreads across both of PCHEM’s major business segments – O&D and F&M; but was heavily supported by increased production volumes – attributed to higher plant utilisation rate throughout the quarter at 97% (vs only 72% in 2Q22 due to major planned maintenance for two of its largest plants: PC Fertiliser Sabah Plant and PC Methanol Plant 2). Bloomberg data shows that average polyethylene prices were down substantially QoQ, ranging from -19% to -21% while average urea and methanol prices dipped also throughout 3Q22 at -11% and -13% QoQ.

YoY. Core net profit was down 8% YoY – primarily dragged by lower product spreads from the group’s O&D division. Our findings from Bloomberg data shows that average polyethylene prices slid YoY throughout the quarter – ranging from -5% to -7%.

YTD. Core net profit was up by 10% YoY in 9M22 mainly due to elevated urea and methanol prices at +62% and +11% respectively, which boosted its F&M segment’s profits by a good 22% YoY but was palliated by a 12% decline in its O&M division’s profits.  

Outlook. We are in view that PCHEM’s profits will peak in FY22 and decline in FY23f. With the imminent start-up of new supplies globally (which has been delayed for c.2 years owing to the pandemic), we strongly believe that the petrochemical upcycle is now behind us as product spreads are seen to be coming off their respective peaks. While we note that Perstorp’s contribution will essentially boost PCHEM’s earnings in 4Q22 onwards, we advise investors to look further beyond the quarterly horizon and to lock in profits amidst the likely outcome of a petrochemical bear cycle in 202 3. Also, we highlight that the group’s Pengerang Petrochemical plant is closed due to the recent fire incident in the region, in hopes to restart the plant in 1Q23.

Forecast. We raise our FY22-24f net profit forecasts by 17%, 15% and 14% respectively to account for the completion of Perstorp’s acquisition and higher urea price assumption.  

Downgrade to HOLD – TP: RM9.20. In view of an imminent normalisation in product spreads, we believe that PCHEM’s profits will peak in FY22 and decline in FY23f. We advise investors to lock in profits and embrace the likely outcome of a petrochemical bear cycle in 2023. With that, we downgrade PCHEM to HOLD with a lower TP of RM9.20/share (from BUY – TP: RM11.76/share previously) – pegged to a multiple of 10.5x, which is in-line with the valuation of its global peers, as shown in Figure #5.

Source: Hong Leong Investment Bank Research - 29 Nov 2022