Chemical companies riding high

Higher value: A worker checks valves at the Al-Sheiba oil refinery in the southern Iraqi city of Basra. The prices of petrochemicals and polymer in Asia had increased between 10 to 40 in the last one year, reflecting firmer crude oil prices. — Reuters

But momentum will likely slow as prices are coming under pressure

THE continued global economic recovery and rebound in crude oil prices from their multi-year lows have helped much of the chemical industry to register favourable sales and earnings over the last one year.

In Malaysia, this trend is evident, as several companies involved in the petrochemical and industrial chemical businesses, such Petronas Chemicals Group Bhd (PetChem), Ancom Bhd, Nylex (M) Bhd and Samchem Holdings Bhd, have seen their earnings lifted by robust demand and favourable selling prices.

These companies are also arguably among the best-performing stocks on Bursa Malaysia in recent months.

For instance, PetChem’s shares, which have been rallying since a year ago, have thus far registered gains of 11.34%, while Samchem’s shares have almost tripled in value from a year ago.

Smallish players Ancom and Nylex – both of which also have other business interests such as logistics and media, and are helmed by Datuk Dr Siew Ka Wei, the owner of media company Redberry Sdn Bhd, as their group managing director – have also seen their share values gained significantly.

Ancom and Nylex’s shares, which started rallying at the beginning of this year, have seen their values almost tripled and doubled, respectively.

In comparison, the FTSE Bursa Malaysia KL Composite Index has gained 8.8% year-to-date. From a year ago, the key benchmark index has risen by only 8.2%.

Growth drivers

The impetus behind the strong performances of some of the chemical companies in the past one year has been their ability to significantly grow their earnings and revenue in tandem with the rising economic activity and recovery of crude oil prices, an analyst says.

“The fundamental growth drivers in the industry, such as the expanding demand for plastics, textiles, automotive, healthcare, food and agriculture, among the many daily-use items that use petrochemicals as feedstock, remain strong ... this is backed by population growth, and supported by growing economic activities,” the analyst with a local investment bank explains.

“And with crude oil prices having come off their lows over the last one year, these companies have been able to profit further from a favourable price environment for their products,” he adds.

According to industry estimates, the prices of petrochemicals and polymer in Asia had increased between 10% to 40% in the last one year, reflecting firmer crude oil prices, even as demand growth, driven by China, continued to outpace supply.

Take PetChem. The petrochemical giant saw its net profit double to RM1.29bil, or 16 sen per share, in the first quarter ended March 31, 2017, from RM592mil, or seven sen per share, in the corresponding period a year ago, thanks to higher output, sales volume and product prices.

In its result announcement last month, PetChem said it achieved a higher plant utilisation rate of 99% for the quarter in review, compared with 92% in the previous corresponding quarter. The higher production was matched with favourable prices and improving demand, thus resulting in higher sales volumes.

PetChem revealed its product prices on the overall rose at an average rate of 22% year-on-year (y-o-y) during the quarter in review in tandem with the recovery in crude oil prices, which rose to US$54 (RM230.40) per barrel in the first quarter of this year from an average of US$44 per barrel last year.

Similarly, Samchem continued its streak of good results from last year, with a net profit growth of 37.5% y-o-y to RM5mil, or 3.68 per share, in the first quarter ended March 31, 2017, on higher sales and profit margin.

The group, which will be holding an EGM later this month as it seeks to remove a director, said it expected its performance to remain positive for the remaining part of the year.

As for Ancom, it is on track to return to the black for the financial year ended May 31, 2017, as its nine-month result already showed a net profit of RM13.3mil, or 6.16 sen per share, compared with a net loss of RM1.8mil, or 0.83 sen per share, in the previous corresponding period. The group’s positive results were driven by contributions from its agricultural and industrial chemicals and polymer divisions.

Meanwhile, its sister company Nylex saw its net profit almost triple to RM13.6mil, or 7.09 sen per share, for the nine months ended Feb 28, 2017, from RM4.7mil, or 2.42 sen per share, in the previous corresponding period, thanks similarly to higher contribution from both the industrial chemical and polymer divisions.

Pressure building

The optimism, however, is somewhat waning, as the renewed prospects of lower oil prices have started putting pressure on petrochemical and polymer prices. In addition, demand growth is seen slowing.

“The outlook on petrochemical and polymer prices has turned bearish because of the soft Asian market and weak demand from Europe,” an analyst notes.

“The weakness in crude oil prices in recent weeks has further exacerbated the pressure on petrochemical and polymer prices,” he adds, pointing to the trend of the global ICIS petrochemical index (IPEX) as an indication of the pressure building up in the industry.

The IPEX extended its decline for the third consecutive month in May, dropping 5% to 242.4 points from April’s 255.9, driven by lower petrochemical prices globally. The index was at its 2017 peak in February at 288.3 points.

“The softer outlook on the industry will likely cap future gains of some of the stocks,” another analyst argues.

Petchem’s shares closed one sen lower yesterday at RM7.20, which implied a valuation of 16 times its forward earnings, compared with the regional peers’ average of 11.5 times.

A Bloomberg survey of 21 analysts shows there are seven “buy” calls on the counter, against 10 “hold” and four “sell” recommendation on Petchem.

Samchem, Ancom and Nylex, on the other hand, are not covered by any analyst.

Samchem’s shares yesterday gained 2.5 sen to close at 99.5 sen, while Nylex’s shares rose five sen to end at RM1.07 and Ancom’s shares fell one sen to close at 82 sen.