Investment Highlights

• We maintain HOLD on Petronas Chemicals Group (PChem) with a lower fair value (FV) of RM6.63/share (from RM6.85/share previously), pegged to FY24F EV/EBITDA of 8x – at parity to its 3-year average. Our FV reflects our 4-star ESG rating which accords a 3% premium .

• The lower FV is to account for our expectation of a longer recovery in product prices. Similarly, our downwards FY24- FY25 earnings revision of -11%-18% reflects our gradual broad-based recovery outlook for petrochemical product demand, mainly led by the olefins & derivatives segment (O&D) in the near term.

• PChem’s FY23 core net profit (CNP) of RM1.7bil (excluding inventories write-off and net loss on foreign exchange) was below expectations, missing our forecast by 11% and street’s 21%.

• The group declared an interim dividend per share (DPS) of 5 sen, bringing FY23 to 13 sen. This missed our forecast by 12.8% and represents a payout of 62%. However, we maintain our payout assumption of 51% - at par with its 3- year pre-pandemic average.

• YoY, FY23 group revenue declined marginally by 1%, affected by lower plant utilisation rate from unscheduled plant shutdowns and longer turnaround activities for:
  
  (i) the ammonia plant in Kerteh, Terengganu, which has a capacity of 450k metric tonne per annum (mtpa);
  
  (ii) ammonia and urea plant in Bintulu, Sabah with a combined capacity of 1.2mil mtpa; and
  
  (iii) Methanol 2 plant in Labuan with a capacity of 1.7mil mtpa; and
  
  (iv) methyl-tert-butyl ether (MTBE) and propane dehydrogenation (PDH) plants in Gebeng, Pahang. As such, FY23 total plant utilisation rate was recorded at 85% (-4%-points YoY).

• This was partially offset by the full-year contribution of Perstop to the specialties segment and additional sales from the Pengerang Integrated Complex (PIC) in 3QFY23.

• FY23 group CNP dropped by a whopping 73% YoY from lower product spreads amid weak prices, as EBITDA margin slid by 8%-points, particularly for ethane, ammonia/urea- related products, higher plant maintenance costs, energy/utilities costs and increased depreciation charge.

• QoQ, 4QFY23 group revenue increased by 6.3%, driven primarily by the F&M segment as tight supply market conditions led to higher product prices and sales volume. This was able to more than offset the decline in the O&D segment, which saw weaker-than-expected plant utilisation rate of 70.8% (-7.8%-points) from higher repair activities, an extended turnaround days at PC MTBE, unplanned shutdown at PC Aromatics and a slowdown at PC Olefins due to steam interruption from Utilities Kerteh.

• 4QFY23 group CNP declined by 12% sequentially as the O&D segment registered negative EBITDA of RM67mil due to higher maintenance costs from the unplanned shutdowns and lower product spreads. This was exacerbated by the effective tax rate (ETA) rising to a high of 41% (+16%-points), attributable to higher non-deductible expenses from higher unrealised foreign exchange loss on payables and shareholder’s loan revaluation.

• The specialties segments saw 4QFY23 revenue rise on higher volumes from non-key products, particularly plasticizers and deicers. This lifted overall sales performance as nearly all key segments exhibited lower volumes except for silicones which saw strong demand from the North African region and stocking up of inventories in anticipation for scheduled downtime at Perstop’s Netherland facility. Nevertheless, 4QFY23 EBITDA declined by 90% as margins shrank to 0.3% (-3%-points) due to higher operational expenses from the scheduled turnaround activities in Sweden and higher manpower costs.

• We gather from management that the O&D segment is expected to see a gradual recovery in FY24F as prices are expected to be stable for most product segments due to stronger downstream demand and a tighter supply environment in Southeast Asia and Saudi Arabia. However, paraxylene is expected to soften in line with weakening demand for end-products such as PTA and polyester. The F&M segment is expected to see a softer outlook due to low demand from the off-planting season, despite new Indian tender issuance and the return of ammonia supply. Methanol is expected to be more resilient as prices are expected to be stable due to a supply shortage in Southeast Asia and tight supply from the Middle East.

• The group expects to deliver FY24F plant utilisation rates of 90% amid the following scheduled plant maintenance activities:
  
  (i) urea and ammonia plant in Gurun, Kedah for 50 days (up to mid-March);
  
  (ii) methanol 1 plant in Labuan for 60 days starting in June;
  
  (iii) polyethylene plant in Pengerang, Johor for 55 days beginning in September; and
  
  (iv) Asean Bintulu Fertilizers for 60 days in 4QFY24.

• Moving forward, we expect a gradual recovery in near-term earnings performance backed by stronger utilisation rates. We remain cognizant of the current demand and supply environment and believe product prices will remain flattish for now amidst slow economic growth and high inflation.

• PChem appears unattractive at a current FY24F EV/EBITDA of 9.1x, a 17% premium to its 3-year EV/EBITDA average of 8x and offers an unassuming dividend yield of 3%.

Source: AmInvest Research - 27 Feb 2024