Petronas Chemicals (PCHEM MK, BUY, TP: MYR12.21)
Commendable Start; Keep BUY
The research house has kept ‘BUY’ call on PChem and set the target price (TP) of MYR12.21, with 22% upside and c.4% FY22F yield. Petronas Chemicals booked another solid quarterly earnings in 1Q22 (+52% YoY), anchored by better numbers from the fertilisers & methanol division. The long-awaited Pengerang Integrated Complex kickstarted in May, while the petrochemical plant will follow suit in phases. Near-term earnings should be solid, and its valuation remains attractive (below 5-year mean) – even with the ASP moderation anticipated – in line with analysts’ crude oil forecasts.
Within expectations. 1Q22 core earnings of MYR2.0bn (+52% YoY) came in within expectations at 28% and 29% of consensus’ full-year estimates. No dividend was declared, as expected.
1Q22 core earnings dropped 6% QoQ to MYR2.0bn after stripping off a MYR30m FX gain and MYR21m inventory write-back. The weaker performance was due to lower JV & associate profit (-29%) and higher tax expenses (41%). Note that despite olefin and derivative revenue fell 19% QoQ on lower plant utilisation of 75% (4Q21: 101%), its segmental EBITDA still improved by 14% on stronger blended product margin offsetting the weaker F&M EBITDA (-14%) as a result of higher maintenance costs. YoY, 1Q22 core earnings also surged 52% YoY, mainly on stronger F&M ASPs and margin.
Outlook. The petrochemical plant at Pengerang is expected to commence operations in phases following the PIC start-up in early May. Managementis targeting the plant to achieve 50-60% utilisation in 2H22 and subsequently ramp up to the optimal level of 90% in 2023. It is believed the plant will record minimal losses in 2H22 during the ramp-up phase. PCHEM’s average plant utilisation rate guidance ex-PIC for 2022 remains at >90%, with the remaining two scheduled plant turnaround to be
completed by 2Q22. Overall petrochemical prices should remain elevated amidst geopolitical uncertainties and high gas prices. Meanwhile, the MYR7bn Perstorp acquisition will enable PCHEM to strengthen its petrochemicals portfolio and selectively diversify into derivatives and specialty chemicals. The transaction is slated for completion by 2H22 – pending shareholder approval at an EGM and anti-trust clearances in certain jurisdictions. Post-acquisition, the company is still estimated to remain at a net cash level of c.MYR7bn (end FY21: MYR14bn).
The research house maintains their earnings estimates and TP at MYR12.21, pegged to an unchanged 9x FY23F EV/EBITDA, ie its 5-year mean. It has also incorporated a 2% ESG premium based on an ESG score of 3.1. Downside risks: Weaker-than-expected petrochemical prices and plant utilisation rates.
SKP Resources (SKP MK, BUY, TP: MYR2.22)
Scaling Greater Heights; Keep BUY
‘BUY’ rating maintained by the reesarch house on SKP, new TP of MYR2.22 from MYR2.40, 50% upside with c.5% FY23F (Mar) yield. SKP Resources’ record FY22 results met expectations, with better operating efficiency propelling an encouraging 28% YoY earnings growth. The arrival of a new labour intake and the commissioning of more production lines would be the key earnings growth drivers in FY23F (+24%), whilst labour-related concerns are close to being resolved. Its current valuation is attractive, taking into account the strong earnings growth and the sector’s insulation from a rising cost environment.
FY22 results are within expectations. This is despite its net profit of MYR165m (+28% YoY) accounting for 103-106% of the Street’s forecasts, as 4QFY22 was aided by a favourable effective tax rate (ETR). Post-results, the research house makes no material changes to FY23-24F earnings, and take opportunity to introduce our FY25F net profit (+8% YoY). The house cuts their TP to MYR2.22 (no adjustment accorded, on its ESG score of 3.0), based on a lower 17x FY23F P/E, or close to +1SD from its 5-year mean. This is consistent with the adjustment the research house made to the technology sector and its peer VS Industry (VSI MK, BUY, TP: MYR1.26), as it factors the aggressive rate hike expectation and high bond yields into their valuations.
Results review. YoY, FY22 revenue inched up by 2% to MYR2.3bn, notwithstanding various challenges throughout the year including lockdown restrictions as well as the shortages of labour and parts components, with the order demand from its key customer remaining solid. That said, FY22 operating profit surged 30% YoY to MYR214m on a 2ppt margin expansion, driven by improved operation efficiency and higher contributions from printed circuit board assembly production. QoQ, 4QFY22 revenue slipped 14% to MYR577m due to the Lunar New Year break and seasonal swing. However, 4QFY22 core net profit was able to stay level after recognising a reinvestment allowance which led to a low ETR of 8.9%.
New labour supply to drive robust FY23F growth. It is understood that the new intake of foreign workers will arrive in batches from June onwards, and that should relieve the current constraint and facilitate the commissioning of two new production lines in July. In addition, SKP has secured another new contract that is scheduled to start production in December. As such, it is expected the earnings to pick up strongly in 2HFY23. Meanwhile, the construction of new production facility is on track to be completed by end-2022, and provide much-needed new capacity. On the other hand, the analyst gathers that the labour audit is completed – SKP expects positive results when the report of the findings is released in 1-2 weeks.
Downside risks include delays in the commissioning of new production facility and market share loss.
Padini (PAD MK, BUY, TP: MYR3.95) – UPGRADE
Stronger Consumer Sentiment Ahead; U/G To BUY
This counter is upgraded to ‘BUY’ rating from Neutral, new DCF-derived MYR3.95 TP from MYR3.15, 23% upside, c.4% FY22F (Jun) yield. 9MFY22 earnings beat expectations, with the higher footfall and consumer confidence post lockdown underpinning the strong sales performance. Upgraded for the reasons: its branding of value-for-money offerings, and look forward to possible expansion plans with the transition to endemicity. Trading below mean, its valuation is attractive, considering its positioning as a strong recovery proxy – poised to benefit from the potential market consolidation.
9MFY22 earnings above estimates. Padini reported 3QFY22 earnings of MYR32.6m, bringing 9MFY22 earnings to MYR76.7m. In expectation of a robust 4QFY22 driven by Aidil Fitri festivities and stronger purchasing power, it is deemed the results to have exceeded expectations at 70% of our full-year estimates and 82% of consensus’.
Results review. YoY, 3QFY22 revenue of MYR329.3m was up 25.3% from higher footfall and stronger sales performance, as all outlets were operatingat full capacity in line with the country’s high vaccination rates. Correspondingly, 3QFY22 earnings surged by 167.6%, supported by cost-optimisation efforts on the labour front, and subsidy wages received during the period. QoQ, 3QFY22 revenue and profit fell 22.9% and 46.5% from last quarter’s peak, due to seasonal factors and waning pent-up demand. Despite the negative QoQ performance, 3QFY22 GPM was up 2.1ppts QoQ, at 39.5%. A dividend of 5 sen was declared for the quarter.
Risks include a sharp rise in operating costs, and weaker-than-expected consumer sentiment.
Pintaras (PINT MK, BUY, TP: MYR2.95)
Still In The Black Despite Cost Pressures; BUY
BUY, new MYR2.95 TP from MYR3.24, 18% upside with c.6% FY22F (Jun) yield. Pintaras’ 9MFY22 core earnings of MYR28m (-28.4% YoY) missed expectations, making up only 47% and 65% of the Street’s full-year projections. The negative deviation was due to the higher cost of sales (+33% YoY) and lower other operating income (-70% YoY). Note that PINT is the only piling company under our coverage that recorded a profit. Rerating catalysts include the possibility of clinching a sizeable subcontract for Mass Rapid Transit 3 works, as it was involved in Mass Rapid Transit 1.
Construction wing reported a lower revenue of MYR74.8m (-16.4% YoY) for 3QFY22 due to lesser construction activities, as several projects reached completion. In terms of PBT, the construction segment saw a 96% YoY drop in the quarter, due to downward adjustments on the projected profit for on-going projects in Malaysia as a result of high material costs. Nonetheless, the construction segment is set to benefit from recently awarded jobs in Singapore that are expected to contribute to group numbers ahead. Recall that c.80% of the group’s MYR330m orderbook comes from Singapore. Therefore, the research house is of the opinion that PINT could benefit in the long run from Singapore’s construction demand, which is projected to reach SGD25-32bn pa over 2023-2026, according to Singapore’s Building and Construction Authority (BCA). Moreover, the majority of contracts in Singapore are government projects with variable price clauses. As such, this could mitigate the uncertainty from Malaysia’s construction sector.
Manufacturing sales continued to grow. The division recorded PBT of MYR11.9m (+21.6% YoY) in 3QFY22 due to higher sales volumes and pricing. With that, its PBT margin remained strong at 21.1% in the quarter. Looking ahead, metal container operations should benefit from stable domestic demand from major customers such as Nippon Paint, which forecasts a 5-10% revenue growth in 2022. Also, this unit is able to gradually pass on some of these additional costs to customers.
FY22-23F earnings to be slashed by 42%, 25% and 11% as the analyst pencil in more conservative margin assumptions in relation to Malaysian contracts, and trim other operating income estimates. In the longer term, though, any material cost hikes should have a limited effect on latest projections, due to the aforementioned variation of price clauses in Singapore government contracts – which justifies the analyst’s BUY call. Our new TP of MYR2.95 is pegged to 11x P/E on FY23F EPS, with a 4% ESG discount based, on in-house ESG scoring methodology. 11x P/E is at a 15% discount to the KLCON index’s forward P/E, which is also on the lower end of the range of its Singaporean piling peers’ P/Es (9x-24x), to reflect; i) Risks from Malaysia; and also ii) competition in Singapore’s smaller market.
Key downside risks include a failure to secure new contracts and project delays
