KEY INVESTMENT HIGHLIGHTS

• 9MFY24 revenue up +8%yoy, readjusted earnings up +5%yoy, but came in below our expectations
• Lower earnings pre-adjustment (-53%yoy) was due to higher unrealised forex loss, offset by higher production and sales
• Headwinds remain until end-year but supported positive momentum from consumer and plantation, higher utilization rate
• Downgrade to NEUTRAL with revised TP: RM4.89

Maintain BUY, revise TP: RM4.89. Petronas Chemicals Group (PCG)'s 9MFY24 earnings came in way below our expectations, with core earnings coming in at 52% of our estimates. We revised our earnings forecast downwards to accommodate the unrealized forex loss with the expectation that the loss will gradually be offset in the near term, with caution that it could prolong until the beginning of FY25. As such, we revised our target price to RM4.89 (previously RM7.54). We also downgrade our call to NEUTRAL for PCG for the slower demand expected until the end-year. Nevertheless, we anticipate higher demand for fertilisers following the expectation of a La Nina climate in FY25, as well as a higher momentum from the consumer sector moving forward.

Revenue rose on higher plant utilisation. PCG's 9MFY24 revenue gained +8.2%yoy to RM23.2b. The higher revenue was mainly due to the higher sales volume, offset by lower product prices. Plant utilization rate saw an increase to 89% (9MFY23: 85%) due to lower maintenance activities resulting in higher production. Production volume in 9MFY24 rose +6.3%yoy to 8.3mMT, supported by all segments.

PAT lower on forex loss. PCG's 9MFY24 earnings slipped -53.4%yoy to RM656m. This was due to higher unrealised forex loss on revaluation of shareholders loan to a joint venture. However, without the impact of the unrealised forex, 9MFY24 core earnings gained +5.4%yoy to RM1.7b, due to lower fuel and utilities costs, as well as higher sales volume.

Plant utilisation higher despite PAT decline. Olefin & Derivatives (O&D)'s 9MFY24 revenue climbed +11.6%yoy to RM11.7b. However, PAT slipped -43.9%yoy to RM559m. O&D recorded higher plant utilisation rate of 92% (9MFY23: 90%), due to lower plant maintenance activities resulting in higher production and sales volume. Revenue was higher due to higher product prices and weakening MYR against USD, while PAT was lower due to the unrealised forex loss.

Higher sales volume supported revenue. Fertilisers & Methanol (F&M)'s 9MFY24 revenue gained +2.6%yoy to RM6.2b, while PAT gained +11.1%yoy to RM1.5b. F&M recorded improved performance due to higher sales volume, offset by lower product prices. Plant utilisation was also higher at 88% (9MFY23: 82%) from lower maintenance activities.

Surging demand for specialties boosted PAT. Specialties' 9MFY24 revenue added +7.7%yoy to RM5.2b, while PAT gained over 2-fold to RM209m from a deficit of RM145m in 9MFY23. The higher revenue and earnings were contributed by: (i) higher sales volume, (ii) lower raw material costs, and (iii) favourable forex impact.

Vulnerable markets remain at a major risk. PCG's performance until end-year continues to be susceptible to: (i) the petrochemical product prices, which closely track crude oil prices, particularly in the O&D segment, (ii) production facility utilization rates, and (iii) forex fluctuations. Facility utilization is also highly dependable on: (i) plant maintenance schedules, (ii) consistent feedstock availability, and (iii) reliable utility supply. Nonetheless, PCG is expected to maintain utilization levels above industry standards, with a focus on operational excellence and strong supplier relationship management.

Moving forward: soft demand for O&D, stable F&M, recovering Specialties. Moving forward, we expect that the O&D prices to remain soft, due to weak seasonal downstream demand - notably for ethylene - and oversupply from new capacity in Northeast Asia. However, this may be cushioned by supply tightness ahead of restocking activities post-Golden Week, amid forecasts of better manufacturing activities by CY25. Meanwhile, F&M prices are predicted to stay stable as key suppliers prioritize term commitments, despite subdued downstream demand. The anticipated onset of La Nina in 1HCY25 is also expected to drive demand for Urea and Ammonia, tightening supply ahead of a growing demand from the plantation sector. Additionally, methanol is also expected to remain stable with possibly tighter supply ahead of winter. For Specialties, gradual recovery is visible in certain end markets, notably from the consumer industry, but we maintain cautious given the macroeconomic uncertainties (including Fed rate cuts and China's stimulus package) and slower demand from construction and automotive sectors that may slowdown near-term recovery.

Revised earnings estimates. Considering the lower earnings in 9MFY24, in tandem with the unrealised forex loss and expected softened demand for O&D and Specialties, we decrease our earnings forecasts for FY24-26 by -49%/-31%/-24% respectively. As such, we revised our target price of RM4.89 (previously RM7.54) and our call to NEUTRAL. Our new target price is based on pegging a PER of 18x to a revised EPS25 of 27.2sen. The PER is based on -1SD to PCG's 5-Y historical PER.

While we anticipate the headwinds for each segments to persist until end-year, we also expect that the overall PCG operations to remain stable. PCG also continues to be supported by the reliability of its plant operations. The recent extension of existing gas sales agreement for the supply of ethane and propane feedstocks at PC Olefin for the next 5 years, signals that PCG continues to uphold its operational and growth excellence. Additionally, the commissioning of its pentaerythritol plant in Sayakha, India, and the beginning of commercial operations in Pengerang Petrochemical Complex bode well on the demand trajectory for petrochemicals in the long run. Nonetheless, we exercise caution on the subsector, given the ongoing geopolitical tensions, volatile oil prices and unfavourable forex against the USD. We maintain our view that, while recovery for the subsector is slower than expected, it is nevertheless imminent.

Source: MIDF Research - 21 Nov 2024