This article first appeared in The Edge Financial Daily on November 15, 2019

Petronas Chemicals Group Bhd
(Nov 14, RM7.40)
Downgrade to sell with a lower target price (TP) of RM7.50: Petronas Chemicals Group Bhd’s (PetChem) core profit for the nine months of financial year 2019 (9MFY19) of RM2.3 billion (-42% year to date [YTD]) was below expectations, accounting for 59% and 65% of our full-year forecast and consensus estimate respectively. The shortfall was largely due to lower-than-expected product spreads, sales volumes and associate contribution.

Quarter-on-quarter bottom line dipped by 58%, mainly due to the product price rout for olefins and methanol which led to margin compression; as well as the plunge in sales volumes resulting from statutory plant turnaround (TA) activities.

Plant utilisation in the third quarter of FY19 (3QFY19) dropped to 81% (2QFY19: 100%) on the back of shutdowns at its ethylene cracker (capacity: 400,000 tonnes per annum) and its related downstream plants for estimated 50 days; as well as its PC Fertiliser Sabah (formerly known as Samur).

YTD weakness was underpinned by prevailing trends since the first half of 2019, comprising margin squeeze from weak average selling prices; associates turned loss-making; and higher operating expenditure from increased plant TA activities. Nevertheless, lower taxes and a weaker ringgit versus the US dollar partially cushioned bottom-line decline.

On account of actual 3QFY19 results, we tweak the following assumptions in our forecasts: (i) lowered product price for methanol by 31%, (ii) increased olefin feedstock cost by an average of 63%, and (ii) slashed associates’ contribution to loss of RM62 million (from RM118 million profit). As a result, our FY19-21 forecasts are lowered by 22-26%.

Weaknesses in product spreads are unlikely to reverse in the near to medium term unless US concludes multiphase trade agreements with China which could lead to normalisation of global economic growth. Until then, demand for petrochemicals — largely from China — will likely remain tepid. Accordingly, this is reflected in weak China purchasing managers’ index readings, which dipped below the confidence threshold since a year ago.

Our TP is reduced to RM7.50 from RM8.70 following the cut in our forecasts. This is based on unchanged calendar year 2020 nine times enterprise value to earnings before interest, taxes, depreciation and amortisation. — TA Securities, Nov 14