Petronas Chemicals Group Bhd (Petronas Chemicals) may see better days as spot urea prices have firmed up in recent months despite the slightly bleak recovery of its overall plant utilisation in 3QFY23 compared to the quarter previously.
This has prompted Kenanga Research to upgrade its call to MARKET PERFORM from UNDERPERFORM, raising its FY24F number by 8% and lifting its TP by 16% to RM7.20 from RM6.20.
However, it cuts its FY23F net profit by 7% as it lower its plant utilisation assumption to 89% from 95%.
“Spot urea prices have recovered to a range of between USD350 per MT and USD400 per MT since Jul 2023, from a low of USD280 per MT in Jun 2023, driven by export restrictions in China since July 2023 to secure domestic supplies.
“YTD, urea prices have averaged at c. USD350/MT, which is consistent with our assumption of USD350 for FY23. We expect the uptrend in urea prices to sustain into FY24 driven by the recovery in the global economy.”
Post conference-call, Kenanga noted the group didn’t expect meaningful recovery in utilisation in 3QFY23.
“Petronas Chemicals is guided for flattish QoQ plant utilisation in 3QFY23 on the back of the shutdown of its methanol plant in Labuan. Recall that in 2QFY23, its overall utilisation fell to 82% from 96% in 1QFY23 due to the shutdown of its Sipitang and Bintulu urea plants for a month.
“In the absence of a significant recovery in its plant utilisation in 3QFY23, our FY23F full-year assumption of 95% now appears lofty. As
such we are cutting it to 89%,” it said.
Besides that, the research house said Pengerang Integrated Complex (PIC) is still under pilot operations while waiting full commencement date from its supporting facilities (cracker owned by Petronas, its parent).
“Pre-operating costs were at RM170m in 1HCY23 and might be slightly higher in 2HCY23 as capacity ramps up further. Hence, we are not expecting PIC to contribute positively for whole of FY23.
“Specialty chemicals is still in the doldrums (as it is) being largely driven by the construction industry in Europe. A slowdown since late
FY22 has crimped its speciality division margins in 1HCY23 because of slower top line growth and less favourable terms from clients.”
As Chinese capacities have been flooding the market given its faltering domestic economy, Kenanga expects to persist throughout 2HFY23 and recovery would gradually resume in FY24.
Meanwhile, it added that the group is still undergoing talks with its parent, Petronas, on its ethane supply contract for its cracker, and we maintain our assumption that the contract would be renewed for another two years without significant change in contract terms.
“Hence, our base case assumes that the majority of its O&D cost structure would be maintained as per before,” Kenanga added.
