Petronas Chemicals Group Bhd - Missed Expectations from Low Plant Utilisation

Date: 
2024-02-27
Firm: 
TA
Stock: 
Price Target: 
7.45
Price Call: 
HOLD
Last Price: 
6.70
Upside/Downside: 
+0.75 (11.19%)

Review

  • Petronas Chemicals Group Bhd’s (PCHEM) 4QFY23 results came in below expectations. FY23 core profit accounted for 85% and 78% of ours and consensus’ full-year forecasts. The negative variance was largely due to lower-than-expected plant utilisation (PU) and product spread.
  • The group declared a second interim dividend of 5.0sen/share (4QFY22: 16.0sen/share), bringing the YTD DPS to 13.0sen (FY22: 41.0sen).
  • FY23 core profit plunged 73.7% YoY due to lower product spread as demand remains weak, higher plant maintenance costs from some planned and unplanned shutdowns, as well as lower overall plant utilisation rate at 85% (FY22: 89%). Note that low plant utilisation rate may lead to margin compression as PCHEM needs to carry out strategic sourcing from third party to fulfil its obligations with customers.
  • Olefin and Derivatives (O&D): Segment turned from EBITDA of RM404mn in 3QFY23 to LBITDA of RM67mn in 4QFY23 on the back of lower sales volume (-7.9% QoQ), lower product spread and higher maintenance cost. Notably, PU was at 70.8% in 4QFY23 (3QFY23: 78.6%) driven by extended turnaround at PC MTBE, unplanned shutdown at PC Aromatics and slowdown at PC Olefins due to steam interruption. The maintenance costs were also higher due to the repair activities above.
  • Fertilisers and Methanol (F&M): 4QFY23 EBITDA surged 28.1% QoQ as sales volume (+16.8% QoQ) and product prices pick up amid tight supply.
  • Specialties: 4QFY23 EBITDA plunged 89.6% QoQ due to higher operational expenses and weak demand in resins and coatings used mainly in construction activities.

Key Takeaways

From Conference Call

  • Pengerang Integrated Complex (PIC) is currently undergoing performance test runs (PTR) and will declare commercial operational date (COD) once PTR are completed. The group is looking at COD in 2QCY24. Although naphtha-based plants such as the ones at PIC have higher costs compared with gas-based plants, the group has arrangements with refinery crackers to have discount to support viability of plants in PIC during difficult times.
  • PCHEM’s effective tax rate (ETR) in 4QFY23 was 40.8%, much higher than the statutory tax rate due to non-deductible expenses (e.g.: unrealised foreign exchange losses, amortisation of intangibles). Management guided that ETR is expected to hover around 15% in the coming quarters.

Impact

  • We lower our FY24/FY25 earnings forecasts by 20.3%/15.1% respectively to factor in the slower recovery in ASP.

Outlook

  • Near term outlook remains challenging as demand remains weak amid ample supply in the market. Nonetheless, we expect product spread to improve once the demand starts to pick up by the end of 2024. China has recently cut its interest rate to support its sluggish economy while advanced economies are expected to cut interest rates in the next few months as inflation rate approaches the central banks’ target.

Valuation

  • We roll forward our base year. Maintain Hold with a lower TP of RM7.45/share (previous: RM7.47/share) pegged to 7x CY25 EV/EBITDA.

Source: TA Research - 27 Feb 2024

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