Kenanga Research has cut its FY23-FY24 net profit forecasts for PetChem by 62% and 17%, respectively, to account for the weaker average selling prices and volumes in the F&M segment.
PETALING JAYA: Petronas Chemicals Group Bhd
’s (PetChem) profit outlook for the second quarter of financial year 2023 (2Q23) looks even weaker than 1Q23, given the cyclical headwinds facing the petrochemical sector, say analysts.
The group registered 1Q23 core net profit of RM604mil, down 29% quarter-on-quarter and fell 71% year-on-year.
For Kenanga Research, PetChem’s latest 1Q23 core net profit was disappointing, merely making up 9% of its full-year forecast and 12% of full-year consensus estimate.
This is mainly due to lower-than-expected sales volumes and product spreads at the fertiliser and methanol (F&M) segment, it added.
As demand is still languishing, Kenanga Research said: “We believe the recovery in global demand for petrochemicals will likely be muted in the near term due to tepid consumer spending, particularly in China.
“This is mainly underpinned by an inflationary environment that has hit consumer spending.”
Moreover, Chinese consumption has shifted from consumer goods during the pandemic to services currently.
“Hence, Chinese consumers are now prioritising travel and social activities.
“This has dented demand for consumer goods that require petrochemical feedstock as raw material input,” the research house said in a note to clients yesterday.
Kenanga Research has also cut its FY23-FY24 net profit forecasts for PetChem by 62% and 17%, respectively, to account for the weaker average selling prices (ASPs) and volumes at the F&M segment.
“We lowered our valuation on PetChem to 14.3 times for 2024 price-to-earnings ratio in line with its large Asian peers, which have recently been de-rated,” it noted.
As a result of this, and coupled with the cut in its forecasts, Kenanga Research has also lowered the stock’s target price (TP) to RM6.20 from RM7.80 previously.
The research house has downgraded PetChem to “underperform” from “market perform” due to the gloomy outlook for ASPs.
“In turn, this may result in sustained weakness in product spreads, and hence earnings,” said Kenanga Research.
Given the weak profitability in the upcoming quarters, CGS-CIMB Research has also downgraded PetChem to a “reduce” call from a “hold” with a lower TP of RM6.18.
The research house said the poor 1Q23 was due principally to RM100mil in Pengerang pre-operating startup costs.
“These costs will likely become larger in 2Q23 and 3Q23, as highlighted during PetChem’s recent results briefing,” it said.
In addition, PetChem only began the startup process for four of the seven Pengerang plants during 1Q23, with all seven plants likely to undergo startup during the next two quarters, thus augmenting startup costs.
CGS-CIMB Research said PetChem targets the commercial operations for Pengerang by 4Q23, which means that in the next two quarters, the group will likely expense even more pre-operating startup costs that could depress its profits.
“The key de-rating catalyst for PetChem is the strong likelihood of weak earnings in the run-up for Pengerang due to startup costs, and a substantial 30% drop in spot urea prices versus 1Q23 average.
“Pengerang will likely suffer earnings before interest, taxes, depreciation and amortisation losses upon commissioning because of low spreads against ethylene feedstock,” it added.
