• Keep NEUTRAL and MYR9.34 TP, 3% upside. We remain cautious on the petrochemicals market, amidst uncertain economic growth prospects and a vague earnings growth profile from Pengerang Integrated Complex (PIC). We are also watchful over the upcoming ethane feedstock supply agreement renewal due in mid-2023 amidst elevated gas prices and maiden earnings contribution from Perstorp following completion of the acquisition in Oct 2022.

• Within expectations. 9M22 core earnings of MYR5.5bn (+8% YoY) are deemed within our expectations, at 81% and 73% of our and Street full-year estimates as we anticipate a relatively weaker 4Q22.

• 3Q22 revenue increased by 7% QoQ on the back of stronger production and sales volume amidst higher plant utilisation of 97% (from 2Q22’s 72%). However, core earnings remained flat QoQ at MYR1.8bn as stronger fertiliser and methanol (F&M) contribution (+26%) led by higher sales volume) was offset by weaker olefin and derivative (O&D) division (-12%; lower margin and ASP). Cumulatively, 9M22 core earnings still grew by 8% YoY, mainly on stronger F&M numbers (+22%, higher product prices) masking the weaker O&D contribution (-9%, lower sales volume).

• Outlook. Despite the fire incident that occurred last month at PIC was not within the petrochemical facilities, management guided to commence operations in 1Q23 once all safety measures and other considerations are fulfilled. Meanwhile, we expect the average ex-PIC plant utilisation rate for 2023 to be higher with lower plant turnaround activities as utilisation this year, in our view, may fall below the guided 90% (9M22: 85%). Overall O&D prices remained under pressure on dampened downstream demand amidst recession concerns while F&M prices have also retraced due to the off- planting season. Being one of the key feedstock, PCHEM’s ethane supply agreement with Petronas is up for renewal in mid-2023. Note that the other ethane supply contract was renewed for another 20 years from end of 2016 till 2036. Acquisition of the Sweden-based niche specialty chemicals company, Perstorp, was completed in October. On the other hand, as Petronas has agreed to provide an equity stake in some of the projects in Sabah, PCHEM is in discussion with the Sabah Government on the potential 25% equity stake disposal in the Sabah Ammonia Urea (SAMUR).

• We maintain our earnings estimates and TP of MYR9.34, pegged to an unchanged 7x FY23F EV/EBITDA, ie -1SD from its 5-year mean. We have also incorporated a 2% ESG premium, based on an ESG score of 3.1. Downside risks: Weaker-than-expected petrochemical prices and plant utilisation rates.

Source: RHB Research - 29 Nov 2022