PCHEM’s 1QFY24 results disappointed due to low plant utilisation and urea prices. Its 1QFY24 core net profit declined 12% YoY, weighed down by higher cost and tax. We expect stable polyolefin and urea prices over the immediate term. We cut our FY24-25F net profit forecasts by 22% and 9%, respectively, reduce our TP by 9% to RM6.28 (from RM6.88) but maintain our MARKET PERFORM call.

Its 1QFY24 core profit of RM534m (after excluding forex translation gain from Pengerang loans) disappointed, coming in at only 15% and 20% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from lower-than-expected plant utilisation and urea prices. The company did not declare any dividends for the quarter as expected.

YoY, its 1QFY24 revenue was flattish as higher sales volumes at the olefin & derivatives (O&D) division, were offset by low utilisation at the fertiliser & methanol (F&M) division, while revenue from the specialty chemicals division was flat. Its core profit declined 12% due to higher cost and tax.

QoQ, its revenue increased by 4% primarily driven by improved utilisation at the O&D division and increased sales volume from the specialty chemicals division. Its core profit more than doubled thanks to lower cost and favourable forex movements.

The key takeaways from PCHEM’s analysts briefing are as follows:

1. The recent unplanned shutdown at the F&M division's Bintulu plant was due to ageing equipment that has since been replaced.

2. It reiterated its guidance for an overall 90% plant utilisation in FY24 despite hectic scheduled maintenance including the PC Methanol plant in 2QFY24, PC Ethylene and Polyethylene Kertih plants in 3QFY24, and the ASEAN Bintulu fertilizer plant in 4QFY24.

3. PCHEM has seen early signs of recovery in the specialty division, with clients resuming restocking specialty chemicals. This division also reported improved EBIT margin in 1QFY24 thanks to more favorable product spreads.

Outlook. Polyolefin prices have begun to recover, currently hovering above USD1,000/MT. However, there are no strong indications of further improvement in the near term due to a tepid global demand outlook for polyolefins. On the other hand, urea prices have softened back to USD300/MT on increased global supply as urea exports from China rise coupled with lower natural gas prices. All in, we believe the group, at best, is only in early stages of recovery.

Forecasts. We cut FY24-25F earnings forecasts by 22% and 9%, respectively, having reflected a lower plant utilisation rate of 89% in FY24 (from 91%) and a reduced urea price assumption of USD330/MT (from USD350/MT).

Valuations. We reduce our TP by 9% to RM6.28 from RM6.88 pegged to an unchanged 15x FY25F PER, in line with the valuations of its Asian peers (e.g. PTT Chem, LG Chem, Formosa, LCTITAN). There is no change to our ESG rating (3-star rating) as appraised by us (see Page 5).

Investment case. We like the company due to: (i) signs of recovery of polyolefin prices supported by firm crude oil prices, (ii) specialty chemicals division potentially having seen trough earnings in FY23 and is poised for a gradual recovery in FY24, and (iii) its superior margins vs. its peers due to a favourable cost structure. However, the upside to its earnings and hence share price is capped by the limited upside to its product prices amidst a tepid global economic outlook particularly in China. Maintain MARKET PERFORM.

Risks to our call include: (i) worse-than-expected economic growth globally leading to weaker petrochemical prices, (ii) Pengerang Integrated Complex (PIC) costs exceeding estimates due to operational issues, and (iii) worse-than-expected oversupply in specialty chemicals particularly in European region.

Source: Kenanga Research - 30 May 2024