Petronas Chemicals Group’s latest financials came in well below market expectations, the group’s 1HFY23 earnings came in at 31.3% of full-year FY23 earnings estimates. Given the continuously challenging outlook, MIDF has maintained a NEUTRAL with a lower target price of RM6.72 (previously RM7.04).
Earnings for the group were down -67%yoy in Q2 to RM628m. This was due to lower product spread and lower share of
profit from joint ventures and as associates compounded by unrealised forex loss on revaluation of debt at Petstorp.
Revenue up +8.1%yoy. 2QFY23 revenue was up +8.1%yoy to RM7.1b, due to higher sales volumes and inclusion of revenue
contribution from a recently acquired subsidiary, partially offset by lower product prices. Overall plant utilisation rate in 2QFY23 was higher at 82% (2QFY22: 72%) due to no statutory turnaround and lower plant maintenance activities.
Olefins & Derivatives (O&D). O&D’s 2QFY23 earnings down55.8%yoy to RM422m. 2QFY23 revenue was up +10.9%yoy to RM3.6b.
The lower earnings were attributable to lower sales volume and higher foreign exchange loss on revaluation of loan, as well as slower demand recovery and increased price competition from China
The house believes that full utilisation of PCG’s production plants relies on maintenance activities, raw material availability and utilities supply. For O&D, ethylene pricing is expected to be supported by firm naphtha price to an average of USD695/MT in the coming quarters (average YTD price: USD640/MT), despite ample supply. Ethylene and Paraxylene are also expected to remain stable on sufficient supply amid China plant shutdowns on top of a balanced demand. Polyethylene is believed to improve in pricing ahead of festivities.
Key challenges for the group are tied to the global economic climate in terms of rate hikes and inflationary pressures, petrochemical product prices in correlation with Brent crude oil prices, utilisation rate of production facilities, and fluctuations in foreign exchange rates. However, we opine that the improvement from China’s economic recovery in CY23 is the main catalyst to mitigate these challenges, in addition to higher demand amid sufficient supply and feedstock.
In consideration of the 1HFY23 earnings coming below expectations, MIDF revised the FY23 and FY24 earnings estimates downwards by -28% and -37% respectively. We input additional cost of sales in tandem with its extensive maintenance activities until the end year and higher energy and utilities cost. The petrochemicals market’s ambiguity in global demand may remain affected by consumer expenditures and competition from other producers. The potential for an excess of products in the market might lead to downward price pressure, impacting profits and lowering plant usage.
However, the house maintains a conservative stance on our perspective for PCG, on the back of a higher Brent crude
price and supply-demand balance, as well as PCG’s commitment to operational and commercial excellence, in the near term.
