Petronas Chemicals Group Bhd’s (PetChem) 9MFY23 results disappointed due to production disruption and polyolefin’s near-term demand outlook remains tepid on soft global demand.
In its Results Note today (Nov 29), Kenanga Research said the group’s 9MFY23 core profit of RM1.4 billion disappointed at only 74% and 55% of our full-year forecast and the full-year consensus estimate, respectively.
“Its core profit plunged 74% YoY due to weaker product spreads at the O&D division, weaker urea and methanol prices at the F&M division, and losses at the specialties division on margin squeeze amidst intense competition.
“We believe its earnings have bottomed in FY23 and it is poised for a recovery in FY24. We cut our FY23 net profit forecasts by 11% after adjusting for lower plant utilisation to 86% from 89% and lowers 24F’s forecast by after assuming lower urea price assumption of USD350/MT (from USD400/MT).
Correspondingly, it also reduces its TP by 8% to RM6.74, from RM7.30 but maintain our MARKET PERFORM call.
“The target price is based on an unchanged 15x PER FY24F – in line with the valuations of Asian peers. There is no change to our 3-star ESG rating as appraised by us,” it said.
As for PetChem’s outlook, the research house said while it appears that polyolefin prices (the O&D division) have stabilised at slightly under the USD1,000/MT level, its near-term demand outlook remains lukewarm.
“On the supply side, the new petrochemical chemical production capacity coming onstream in China in 2024 will cap the recovery in polyolefin prices.
“Meanwhile, the urea market has eased recently with prices at USD299/MT (from USD345/MT in 1HFY23) due to easing of supply concerns globally and weak global demand.
“We believe similar dynamics will persist into FY24 although demand for urea is expected to recover gradually YoY. Losses in its specialities division are expected to narrow as its US and Europe markets are showing early signs of recovery,” Kenanga added.
Kenanga also attended analyst briefing, where it was told that PetChem’s Kertih cracker plant had an unplanned shut down last month due to power disruptions but had since returned to full operation.
“Therefore, the group guided for plant utilization of 85% and above in FY23 compared to 90% a year ago. The group has also secured ethane and propane (feedstock for O&D) supply contract extension from Petronas for another year throughout FY24,” it said.
The research house added that Pengerang Integrated Complex (PIC) is targeted to be fully operational by 1QCY24. Currently, the facility is still at the pilot production stage but its loss before interest, depreciation and amortization halved QoQ on an increased volume.
“We like the group due to signs of bottoming of polyolefin prices supported by crude prices, specialty chemicals division potentially seeing trough earnings in FY23 with FY24 a year of expected gradual recovery, and its superior margins.
“However, the upside to its earnings and hence share price is capped by the limited upside of its product prices amidst a tepid global economic outlook.”
The risks to Kenanga’s call include worse-than-expected economic growth globally leading to weaker petrochemical prices, PIC costs exceeding estimates due to operational issues, and (worse-than-expected oversupply in specialty chemical particularly in European region.
