Petronas Chemicals booked record quarterly earnings again in 3Q21, anchored by better ASPs and JV & associate contributions. Despite projecting a 25% decline in FY22F earnings, its valuation remains attractive – the stock is trading below its 5-year mean.
There should be further earnings upside, if: i) The moderation in ASP is less steep than anticipated, and ii) PCHEM can kickstart the Pengerang Integrated Complex (PIC) project smoothly. Above expectations, largely due to better-than-expected ASPs. 9M21 core earnings of MYR5.1bn (+3.6x YoY) came in above expectations, at 88% and 92% of our and Street full-year estimates. The declaration of a 10-sen special DPS was also a positive surprise.
3Q21 core earnings improved 4% QoQ to MYR1.9bn, after stripping off an MYR25m FX gain and MYR3m inventories write-off. The stronger performance was due to stronger contributions from JV & associates (+53%), as well as the fertilisers and methanol (F&M) division (+4%), amidst a lower overall plant utilisation rate of 94% (vs 97% in 2Q21) and sales volumes. The F&M division’s EBITDA margin rose to 50% in 3Q21 (2Q21: 49%) in tandem with stronger ASPs, while the olefin and derivatives (O&D) EBITDA margin weakened to 30% (2Q21: 35%). 9M21 core earnings also surged 3.6x YoY, mainly on stronger ASPs and margins
Target Price (Return): MYR9.91 (+19%)
Price (Market Cap): MYR8.30 (USD15,861m)
ESG score: 3.10 (out of 4)
Avg Daily Turnover (MYR/USD) 55.7m/13.4m
PIC will only be starting up gradually in 1Q22. If PCHEM achieves a 60- 70% utilisation rate in 2022, RHB believes PIC will incur minimal losses in 1H22 and only start contributing minimally in 2H22. Its average plant utilisation rate guidance for 2022 remains at >90%, with four scheduled plant turnarounds. Overall, 4Q21 earnings may soften QoQ – dragged by weaker ASPs in O&D, but likely cushioned by the resilient F&M division.
RHB increases FY21-23F earnings by 3-9%, to factor in higher ASPs – especially for the F&M division. Its FY22F earnings remain largely unchanged, being offset by the imputation of additional tax expenses arising from the Cukai Makmur (Prosperity Tax, which may impact earnings by c.5%). While the actual impact would vary, PCHEM has guided that the Cukai Makmur would have increased tax expenses by 3-4% on FY20 earnings, as not many subsidiaries did not achieve the MYR100m profit benchmark back in 2020.
TP remains at MYR9.91, on an unchanged 9x FY22F EV/EBITDA (5-year mean). RHB has also incorporated 3% ESG premium based on an ESG score of 3.1. The FY22F earnings indicate a 25% YoY decline on lower ASP and margins, while TP implies 17.1x FY22F P/E (5-year mean) and 2.2x FY22F P/BV (+1SD from 5-year mean). Downside risks: Weakerthan-expected petrochemical prices and plant utilisation rates.