Maybank Investment Bank Bhd (Maybank IB) forecasts continued challenges for Petronas Chemicals Group Bhd (PCG) in the near-term, with a balanced risk-reward profile in the fourth quarter of 2023 (4Q’23).
In light of Saudi Arabia and Russia’s decision to extend oil production cuts, which provides some support to declining average selling prices (ASPs), Maybank IB maintains its view of an earnings recovery for PCG expected in mid-to-late 2024.
Maybank IB maintains “HOLD” and the unchanged RM7 Target Price (TP) is anchored at 8x FY24E EV/EBITDA, positioned at -0.5SD to the long-term mean.
O&D: Oil majors’ production cuts lends floor to ASPs
In light of the recent decision by Saudi Arabia and Russia to extend voluntary crude production cuts through December 2023, ranging from 1.3 million to 1.5 million barrels per day (bpd), Maybank IB’s research indicates expectations for stronger oil and gas (O&G) and downstream average selling prices (ASPs) in the fourth quarter of 2023 (4Q’23).
A brief review of polymer prices (specifically PP/HDPE) reveals that they reached a nearly three-year low in the second quarter of 2023 (2Q’23).
However, these prices have since rebounded by 5% to 10%, driven by more robust feedstock prices and increased restocking activities in preparation for upcoming regional festivities in the second half of 2023, including China’s Golden Week, Diwali, and Christmas.
Despite the relaxation of demand constraints, it’s worth noting that polymer ASPs have remained somewhat subdued when comparing the third quarter of 2023 (3Q’23) to the previous quarter (QoQ).
Near-term operational challenges to limit upside
While the research firm observes increased ASPs and positive demand drivers in most product categories, its research suggests that the second half of 2023 (2H’23) may present challenges for PCG.
This is primarily attributed to two significant turnarounds and maintenance activities that could potentially impact production volumes. Additionally, ongoing start-up losses at PIC are expected to continue to weigh on earnings recovery, with losses of RM100 million or 70 million in terms of LBITDA recorded in the first and second quarters of 2023.
In a separate development, PCG is set to acquire a 113kTpa maleic anhydride plant from BASF Petronas Chemicals Sdn Bhd, with production slated to commence in the second half of 2025.
Although the transaction price remains undisclosed, it anticipates that this acquisition will make a positive contribution to PCG’s Specialties segment starting from 2026.
Risks
Key downside risks to the research firm call and earnings forecast include slower-than-expected global demand; a sudden cooling of the fertiliser market in the event planters switch to alternative crops that do not require a heavy dependence on nitrogen based fertilisers; and the collapse of the natural gas market should governments unify efforts to stabilise constrained supply heading towards the winter months in the northern hemisphere.
Other risks include re-escalation of US-China trade tensions resulting in increased dumping activities from the US into the region; more countries adopting a firmer stance towards banning the usage of single-use/nonbiodegradable plastics; and Pengerang plants achieving poor operating earnings on a weaker-than-expected utilisation rate of less than 35% in the financial year end 2023.
