Analysts ‘neutral’ on PetChem


Caution comes amid fragile oil demand recovery, limited price upside

PETALING JAYA: Amid a fragile recovery in demand and limited upside for crude oil prices, analysts are cautious on Petronas Chemicals Group Bhd’s (PetChem) earnings for the year.

MIDF Research has revised downward its FY20 earnings estimate for the company by -13.6% to RM1.589bil from RM1.840bil previously.

Petronas Chemicals recorded an improved Q3FY20 earnings at RM471mil, which was in line with the recovery in oil price and gradual easing of Covid-19 restrictions worldwide.

Still, its 9MFY20 cumulative earnings of RM1.16bil came in below MIDF’s and consensus expectations at 63% and 60% respectively.

However, it maintained the company’s FY21F earnings estimate given that another year of heavy turnaround activities are expected next year.

“We are maintaining our neutral recommendation on PetChem at this juncture.

“(This is because) we foresee the recovery for both product prices and demand to remain highly reliant on the movement of the crude oil price, which remains highly susceptible to the global Covid-19 development,” said MIDF Research.

The research house expects crude oil price to continue trading sideways between US$40-US$45 per barrel for the rest of the year, which could weigh on the price recovery for petrochemical products.

It kept its target price at RM5.85

“That said, we have a positive bias on the company given that its fundamentals remain intact and it has consistently managed to find a (market) for its products which has translated to the recovery it has experienced in the third quarter,” it added.

Additionally, with the commissioning of RAPID Pengerang slated to take place in 1QFY21, PetChem is expected to start moving towards producing more differentiated and specialised products starting with the commissioning of PC Isononanol in Pengerang.

This will assist in arresting the impact from the subdued product prices if it lingers into next year.

Analysts noted that product prices are expected to remain weak despite initial signs that they could have bottomed out in 2QFY20.

AmBank Research, on the other hand, has downgraded its recommendation on PetChem to “hold” from “buy” as it noted that the share price has risen near its fair value of RM7.05.

“Even though PetChem’s first nine months of the year have accounted for a higher range of 76%–85% of FY17–FY19 earnings, a likely quarter-on-quarter flattish Q4FY20 without any major turnaround activities should deliver results within 5% of market expectations.

“Given that uncertain global economic outlook has clouded the earnings prospects of the group’s 50%-owned Pengerang operation which partly deferred its commencement to 1QFY21, PetChem currently trades at a premium FY21F EV/EBITDA of nine times.

“This is above its two-year average of 8.5 times,” AmBank Research said.
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