Review

• Petronas Chemicals Group Bhd’s (PCHEM) 9MFY24 core earnings came in within expectations at 80% and 76% of our and consensus’ full-year forecasts respectively. This aligns with our expectations, given the anticipated decline in product spread for 4QFY24.

• Olefin and Derivatives (O&D): Revenue increased 3.3% QoQ, mainly driven by a 23.4% increase in sales volume (Plant Utilisation: Q3FY24: 94.8% vs. Q2FY24: 94.2%), though this was partially offset by a stronger Ringgit and lower product prices. Despite the topline growth, EBITDA significantly declined, falling from RM330.0mn in Q2FY24 to an LBITDA of RM137.0mn in Q3FY24. The drop was due to: i) a RM373.0mn rise in Cost of Revenue (COR), reflecting higher production costs; ii) unrealized forex losses of RM496.0mn from the revaluation of PPC payables; and iii) increased selling, distribution, and repair and maintenance costs. These factors outweighed the benefits from higher sales and small administrative cost reductions.

• Fertilisers and Methanol (F&M): Revenue grew slightly by 0.2% QoQ, driven by a 3.0% increase in sales volume, although this was offset by lower sales prices, particularly for Methanol and Ammonia. EBITDA dropped 15.8% QoQ, primarily due to higher maintenance costs and the negative impact of forex fluctuations on revenue.

• Specialties: Revenue declined 11.5% QoQ while EBITDA declined 34.2% QoQ primarily due to lower sales volumes and lower contribution margins. This decline was driven by lower ASP, especially in the Advanced Materials, Engineered Fluids and Lube Oil Additives & Chemicals segments.

Key Takeaways From Conference Call

• During the quarter, US Dollar weakened against Ringgit Malaysia from 4.721 on 30 June 2024 to 4.107 on 30 September 2024.

• Pengerang Petrochemical Company Sdn. Bhd. (PPC) successfully completed its performance test runs in 3Q2024, ahead of its scheduled commercial operation kicking in Nov. PPC, operating with USD as its functional currency, recorded an unrealised forex loss of RM536mn in PCG due to the depreciation of USD against RM, which impacted the revaluation of payables. Furthermore, PCG’s USD-denominated shareholder loan (approximately USD800mn) to PPC incurred an additional unrealised forex loss of RM492mn from adverse forex movements. Including forex losses of RM86mn from other operations, the total forex loss in 3Q2024 amounted to RM1.1bn.

• Several turnarounds are scheduled for the remainder of the year, 2 turnarounds happening as of date with expectation to complete in a few days.

• PETRONAS Chemicals Olefins Sdn. Bhd. (PC Olefins) will continue receiving ethane and propane gas feedstocks under existing price terms. PETRONAS Chemicals Marketing (Labuan) Ltd. (PCML) and PETRONAS Energy and Gas Trading Sdn. Bhd. (PEGT) have agreed to extend the current pricing arrangement for five years, effective 1 January 2025.

Impact

• Maintain earnings forecasts.

Outlook

• Olefin and Derivatives (O&D): Ethylene prices are projected to weaken due to an oversupply in Southeast Asia as regional crackers resume operations after maintenance. Ethylene Glycol (EG) prices are expected to remain stable with balanced market sentiment, although supply is constrained, particularly in the Middle East, due to feedstock shortages. Polyethylene (PE) maintains a soft outlook ahead of seasonal lull, further drop will be cushioned by regional supply tightness and some restocking activities ahead of China's Golden Week. Meanwhile, Paraxylene (PX) prices are forecasted to be stable, in line with weak downstream demand and reduced gasoline blending amidst planned maintenance by several producers.

• Fertilisers and Methanol (F&M): Urea prices are expected to remain stable in Q4, supported by steady demand from India, rising tensions in the Middle East, and anticipated demand growth in Latin America. Ammonia prices are also likely to stay stable, with tighter supply in October due to lower production rates and plant outages, although limited demand from the Far East during the turnaround season could balance this. Methanol prices are projected to be stable, with potential supply constraints due to winter curtailments in Q4. Meanwhile, downstream demand for Acetic Acid, Formaldehyde, and Biodiesel is expected to remain moderate.

• Specialties: The Federal Reserve’s rate cut, despite the upcoming holiday season, could provide a stimulus to boost demand for industrial and specialty products. However, the muted demand growth for specialties, driven by softness in Europe and China, remains a concern as the market monitors the effects of regional interest rate cuts and China’s stimulus package. The building and construction sectors continue to face headwinds as they approach Q4, while the automotive sector shows a downward trend. On a positive note, the consumer goods and retail sectors are expected to maintain their momentum.

Valuation

• We revised our TP to RM5.53/share (previous: RM6.93/share) pegged to 7x CY25 EV/EBITDA (previous: 9x) with an ESG Premium of 3%. Maintain BUY.

• This adjustment reflects a more cautious outlook, primarily driven by ongoing uncertainties in foreign exchange movements and broader market challenges. The recent volatility in currency exchange rates, combined with potential headwinds in global demand and macroeconomic conditions, have prompted us to lower our multiple to better align with the current risk profile and earnings outlook. The reduction in the multiple reflects increased uncertainty and lower growth expectations, as we factor in the impact of these external factors on the company's performance.

Source: TA Research - 21 Nov 2024