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Tuesday, July 23, 2019

PetChem’s earnings likely to soften in Q2 and Q3


Tuesday, 23 Jul 2019

by royce tan

Affun Hwang Research has downgraded the counter from a “buy” to a “hold”, as there are no near-term catalysts for it. It has also lowered PetChem’s target price to RM8.30 from RM10.10 previously

PETALING JAYA: The earnings of Petronas Chemicals Group Bhd
image: (PetChem) are expected to soften in the second quarter (2Q19) and this is likely to further weaken in the next quarter with a heavy plant turnaround, says Affin Hwang Capital Research.

It said this was due to the expectations of a softer demand and the average selling prices (ASPs) generally not showing any recovery.

The research house has downgraded the counter from a “buy” to a “hold”, as there are no near-term catalysts for it. It has also lowered PetChem’s target price to RM8.30 from RM10.10 previously.

“With the United States and China trade talks still looking uncertain and rather unfruitful, we believe product ASPs would likely remain low for the rest of 2019.

“Overall 3Q19 plant utilisation is expected to be lower as PetChem undergoes its heaviest plant turnaround exercise, with the cracker plant to be shut down for more than a month and the polymer and fertiliser plants for 30 days,” it said.

Assuming no recovery in ASPs, PetChem’s earnings are expected to be weaker quarter-on-quarter (q-o-q).

Polyethylene (PE) product prices declined 4% q-o-q in 2Q19, while that for polypropylene was relatively flat.

In the fertiliser and methanol (F&M) segment, the urea price was up 1% q-o-q on better South-East Asian demand, but the methanol price saw a 3% q-o-q decline, currently at the year-low of US$259 per tonne.

“We expect the 2H19 Brent oil price to trade in the range of US$65 to US$70/bbl, hence capping any drastic recovery in product ASPs,” the research house said.

Affin Hwang has cut its financial year 2019 (FY19)-FY20 earnings per share forecasts for PetChem by 18% to account for weaker ASPs for methanol (down 15% to US$290 per tonne) and PE products (down 5% to US$950 to US$1,000 per tonne).

It has also slashed the FY21 forecast by 19% to account for weaker long-term PE prices (lower by 25% to US$900 per tonne), as a result of rising capacity in China and softer global demand.

The research house said PetChem’s share price has fallen by 7% over the past week and is now trading at a 12-month forward PE ratio of 17 times, close to its five-year mean of 16.7 times.

It added that the current valuation is justified, given the group’s long-term capacity expansion growth once the dust settles, but its upcoming weak results may not be fully priced in.

AmInvestment Bank Research has also given PetChem a hold rating, maintaining its previous call but this time with a lower fair value of RM7.80 from RM9.50.

It has cut its FY19F-FY21F earnings by 18% to 21% by lowering the average product price assumptions by 5% and a 2% decline in demand growth.

“Our FY19F–FY21F earnings are now 12% to 17% below the street’s, with the FY19F net profit of RM3.7bil declining by 26% year-on-year (y-o-y) from its all-time record performance of RM5bil which benefited from an average crude oil price of US$71 per barrel (vs US$62 per barrel currently) and commendable average plant utilisation of 92%,” it said.

The research house added that the Pengerang plant, which will increase the group’s effective annual production capacity by 15% or 1.9 million tonnes to 14.6 million tonnes, has already reached mechanical completion and is currently being commissioned progressively.

As crude oil prices have slid 9% from an average of US$68/bbl in 2Q19, AmInvestment Bank has also cautioned that the group’s product prices have a strong correlation to Brent crude oil prices amid weakening global demand for petrochemical products.

PetChem was among the top losers yesterday after its share price slid 1.41% to RM7.70 with 3.52 million shares being traded.


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