With 2023 and 2024 behind us, we believe that 2025 could be a year where the global business cycle (manufacturing, particularly) picks up again with the US ISM PMI looking to recover after bottoming. That aside, global plant turnaround activities are expected to rise in 2025 as more ageing plants need to be shut down for maintenance. Also, at this level, we believe that the share price has priced in the worst-case scenario for PIC loss. We lift our forecast and TP to RM5.47 (from RM5.00) and upgrade our call to OUTPERFORM from MARKET PERFORM.

Petrochemical prices appear to run in 3−to−4-year cycles.

Historical price trends of LLDPE and HDPE (polyolefins) reveal a recurring 3-year boom-and-bust cycle. For instance, prices entered a bearish phase in 2019-2020, falling to approximately USD700/mt during the Covid-induced economic recession. However, by 2021, prices surged to a peak of USD1,380/mt. Similarly, polyolefin prices experienced a 2-year downturn in 2016-2017, followed by a significant spike in 2018. This cyclical pattern highlights the industry's sensitivity to macroeconomic trends and supply-demand dynamics and will typically fare better in the third year of the market cycle.

Where are we in the cycle now assuming a similar pattern will follow? Based on historical trends, 2025 marks the third year of the polyolefin price cycle, suggesting a potential uptrend. Adding to this, the US ISM Purchasing Managers Index (PMI) has been in a downtrend since 2022, consistently hovering below the 50 level during 2023 and 2024, indicating prolonged contraction in industrial activity.

In Exhibit 2, the positive PMI trend has been moving in tandem with the YoY improvement in polyolefin prices, hence we believe investors should look out for a potential inflection point in 2025.

PIC bear case priced in. We believe that the share price (-33% since May 2024) has priced in the bear case scenario for PIC loss which we assume at an estimated RM780m due to weak polyolefin-olefin spreads, implying an EBITDA breakeven scenario at 80% utilisation for FY15F. That aside, we hold a slightly more bullish outlook on its olefin & derivatives division with a price assumption of USD1,150/mt on the back of the business cycle thesis, arriving at a FY25F PER of 12.9x, significantly below its 5-year average (15.7x).

Forecast. We revise our FY25F core profit by 10% to reflect higher polyolefin price assumptions (USD1,150/mt from USD1,000/mt earlier) and higher specialty division profit.

Valuations. We raise our TP to RM5.47 (from RM5.00) pegged to unchanged 15x FY25F PER, in line with the valuations of Asian peers, i.e. PTT Chem, LG Chem, Formosa and LCTITAN (Not Rated).

Investment case. We like the company due to: (i) signs of bottoming of polyolefin prices being supported as the global business cycle bottoms, (ii) specialty chemicals division potentially seeing trough earnings in FY23 with FY24 a year of expected gradual recovery, and (iii) its superior margins vs. its peers due to a favourable cost structure.

Upgrade to OUTPERFORM from MARKET PERFORM.

Risks to our call include: (i) weaker-than-expected economic growth globally leading to weaker petrochemical prices, (ii) PIC costs exceeding estimates due to operational issues, and (iii) worse-than- expected oversupply in specialty chemicals, particularly in the European region.

Source: Kenanga Research - 26 Dec 2024