Strong Q3 earnings seen for PetChem


  • Business
  • Wednesday, 23 Feb 2011

PETALING JAYA: Petronas Chemicals Group Bhd (PetChem), a Petroliam Nasional Bhd (Petronas) unit which was listed on the Main Market last November, should see strong third-quarter earnings owing to high utilisation rates and strong product margins.

The local petrochemical producer, which is due to release its third-quarter results this week, has two core business segments olefins and polymer as well as fertiliser and methanol.

Maybank Investment Bank Research estimates PetChem's earnings (profit after tax and minority interest figures) for the period ended Dec 31, 2010 to be RM817mil, up 62% quarter-on-quarter from RM503mil posted in the second quarter.

PetChem had seen its product margin (product selling price minus raw material cost) for the quarter rise by 15% year-on-year and 15% quarter-on-quarter, said the Maybank analyst.

He said, in a report issued this month, the global commodity run had pushed product prices up while PetChem's raw material prices, mainly natural gas, had remained fairly stable.

Manulife Asset Management Malaysia head of equities Tock Chin Hui told StarBiz PetChem's third-quarter results should see sequential improvements in US dollar terms, backed by improving petrochemicals spreads for the period due to stronger product prices during the third quarter.

“Going forward, we believe potential earnings upside to be the strongest catalyst for the stock on the back of widening petroleum chemical spreads. Petrochemical product prices have been stronger on a year-to-date basis and, given the company's low-cost gas feedstock, spreads are likely to be on widening trends as well,” Tock added.

She expects improving efficiency and margin as the company consolidates its different chemical operations.

Maybank also expects PetChem's fourth-quarter (ending March 31, 2011) results to be even better as product margin continues to rise due to higher commodity prices.

“The prices of natural-based commodities are significantly higher than its synthetic substitute. This divergence is boosting the appeal of synthetic materials. PetChem will also reap the benefit of the Labuan methanol plant that was commissioned last month,” it said.

Meanwhile, JP Morgan said in a report last month that PetChem's financial year 2011 (FY11) results were likely to surprise on the upside as the first half of 2011 results did not include the strong product spreads seen in the final quarter of last year.

For the six months ended Sept 30, 2010, PetChem's net profit was up 21.2% to RM1.19bil from RM980mil a year ago while revenue rose 21% to RM6.34bil from RM5.22bil previously.

The company's second-quarter net profit fell 8.9% to RM503mil from RM552mil a year ago despite a 10% increase in revenue to RM3.17bil from RM2.88bil. The group recorded a lower operating profit owing to a one-off negative goodwill of RM175mil arising from the acquisition of Optimal Glycols (M) Sdn Bhd in the corresponding quarter.

JP Morgan, which initiated coverage on PetChem last month, added that the recent increase in oil price was positive for PetChem as most of its raw material costs were not linked to crude but its product prices were.

It said that higher-than-expected urea prices during the first half of this year due to China's introduction of a 110% export duty on urea until June would be positive for the company's fertiliser and methanol segment, which had underperformed in FY10.

JP Morgan said its FY11-13 estimated compound annual growth rate of 20% for PetChem's earnings was conservative in light of recent oil price increases.

Meanwhile, its downside risks include a rapid ringgit appreciation, which will negatively impact spreads, and changes in PCG's gas feedstock pricing.

Tock said Manulife continued to like PetChem for its strong leverage play into rising crude oil prices and chemical product demand up-cycle trend as global economy resumed its recovery.

According to Bloomberg data, analysts' estimated consensus for PetChem's FY11 is RM13.3bil in sales (revenue) and RM2.72bil in net income adjusted.

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