We maintain PChem at HOLD despite 9M24 core net profit (CNP) coming below expectations at 67% of our forecasts as recent foreign selling pressure has pushed valuation close to floor levels. YTD plant utilisation of 89% (+5%-pts YoY) brought production levels higher and drove topline performance amidst flattish product prices. Expect 4Q24 to be soft as olefins and derivative (O&D) and specialties outlook appears soft. We revise
our earnings downwards by 5-16% and cut our target price (TP) to RM5.10/share (from RM5.90/share) as we maintain a conservative outlook on its performance amidst a sluggish global PMI environment.

• Maintain at HOLD. We revise our earnings downwards by 5-16% for FY24E-FY26F to account for flattish product price assumptions premised on our conservative outlook over global PMI performance over the next 2 years and higher interest expense arising from its 50%-joint operating entity Pengerang Petrochemical Company Sdn Bhd (PPC). Accordingly, we lower our TP to RM5.10/share (from RM5.90/share previously) as we rollover our earnings base to CY25 and peg at a lower target EV/EBITDA of 7.5x, or 1 std dev below its 10-year mean, which we think as the petrochemical sector is currently in a downcycle.
• Floor level in sight. Downside risks to fundamentals are limited for now, as we have priced in risks from softer prices, planned maintenance program and losses from PPC. Though we do not discount further downtrend in share price, we think this is less likely as foreign shareholding is now at 7.8%, or at the lower end vs. its typical range of 7-10%. We see opportunity for upside as the sector is now close to multi-year low holdings. According to our fund flow tracker which tracks percentage of tracked AUM from over 90 funds, the energy sector holding is currently at 3.4% as at end-September, close to its lowest level of ~3% in mid-2022.
• Expect 4QFY24 to be soft. 9M24 CNP of RM1.3bil was below estimate and comes to at 67% and 61% of our and consensus estimate respectively. Variance was largely due to larger than expected interest expense incurred at PPC. Headline CNP was negative in 3Q due to forex losses of RM1.1bil which involved revaluation of payables and shareholder loan. We do not expect a recovery in prices soon, and project a marginal 5-6% increase in product prices by 2026 onwards. PPC commenced its operations on target with management's guidance but saw EBITDA loss of RM130mil due to commissioning expenses. Given the quantum, we expect discussions to commence with its counterparts at Pengerang Refining Company Sdn Bhd on a potential discount to its feedstock cost in the near future.

Source: AmInvest Research - 21 Nov 2024