PETALING JAYA: With weaker selling prices likely to persist this year, Petronas Chemicals Group Bhd
(PetChem) seems to be headed for a lower bottom line, amid losses from its Pengerang petrochemical facilities.
The group also faces increased headwinds affecting the petrochemical sector in 2023, resulting in CGS-CIMB Research slashing its target price to RM8.33 per share from RM8.37.
However, the research house said the “negative earnings momentum looks priced-in”.
In a note, CGS-CIMB Research added that PetChem’s cyclical earnings are likely past their peaks in the financial years of 2021 and 2022 (FY21-FY22) and will likely be headed lower in the forecast period.
“We think that increases in global petrochemical production capacity and supply, and a potential slowdown in global consumer spending due to the squeeze on spending power from the high inflation and rising interest rates could put pressure on global petrochemical selling prices even if feedstock costs remain high.
“We have factored in the Perstorp acquisition, completed on Oct 11, 2022, into our FY22-FY24 earnings before interest, taxes, depreciation and amortisation forecasts,” it said.
Perstorp is a specialty chemicals company, which PetChem acquired for RM10bil, and would be consolidated into the latter’s accounts from the fourth quarter of FY22 (4Q22).
“Perstorp’s earnings have unexpectedly softened in 4Q22, according to PetChem, in comparison to results in the first half of FY22, due to the weakened demand environment,” stated CGS-CIMB Research.
Looking ahead, the research firm said PetChem expects specialty chemical prices to continue moderating, as they have been in recent months, due to weakening demand.
On a more optimistic note, PetChem is hoping that the reopening of China will help improve demand for chemicals in the months ahead. Meanwhile, PetChem also expects the prices of polyethylene polymers (PE), monoethylene glycol (MEG) and urea to moderate from their 2022 pricing levels.
This is due to global capacity additions that may exceed global demand growth, especially in a recessionary environment.
On Pengerang, CGS-CIMB Research said PetChem guided that it will begin commissioning the Pengerang Petrochemical Sdn Bhd (PPSB) plants from 1Q23.
On Oct 27, 2022, a fire broke out at one of the interconnecting pipes in the oil refinery complex, which is linked to PPSB.
According to PetChem, the oil refinery continues to run at a rate of between 200,000 barrels of oil per day (bopd) and 300,000 bopd, while the naphtha cracker is at 70% utilisation.
“PetChem expects to start up one of its two polypropylene polymers (PP) trains in the next few weeks, to be followed by the high-density polyethylene train and the MEG train. Other trains should start up gradually over the rest of the year.
“PetChem expects the average utilisation rate of the PPSB complex to be 50% to 70% for FY23; we have imputed a 65% utilisation, which is not high enough for PPSB to report a net profit given the weak PE/MEG-ethylene and PP-propylene spreads,” said CGS-CIMB Research.
Despite the more challenging outlook, the research firm has upgraded its view on PetChem to a “hold”, as the share price has de-rated 15% from its peak in April 2022.
This reflects CGS-CIMB Research’s expectations of a 24% drop in the earnings per share for FY23. “Assuming a dividend payout of 60%, we forecast 55 sen dividend per share in the next 12 months, taking total returns to 3% against the current share price of RM8.62.”
