According to The Edge Market article published on November 29, 2022, the share price of Petronas Chemicals Group Bhd (PetChem) fell over 4% in early morning trade on Tuesday (Nov 29) after its third quarter ended Sept 30, 2022 (3QFY2022) net profit met consensus expectations.
The share price of Petronas’ chemical arm had fallen 43 sen or 4.74% to an intraday low of RM8.65.
At 11.06am, the counter pared losses to RM8.68, still down 40 sen or 4.41%, and was among Bursa Malaysia’s top losers. Thus far, 3.67 million shares have changed hands. At RM8.68, PetChem has a market capitalisation of RM69.44 billion.
PetChem on Nov 25 said its 3QFY2022 net profit fell to RM1.895 billion year-on-year (y-o-y) from RM1.96 billion following higher product prices supported by elevated crude oil prices amid the Russia-Ukraine conflict and stronger US dollar.
In a note on Tuesday, Hong Leong Investment Bank (HLIB) Research analyst Jeremie Yap wrote that PetChem’s earnings for 3QFY2022 exceeded HLIB's expectations, but were within consensus expectations.
“PetChem registered a decent 3QFY2022 core net profit of RM1.79 billion and 9MFY2022 sum of RM5.67 billion — after having adjusted for: (i) RM67 million amortisation of deferred income; (ii) RM70 million fair value gain; (iii) RM37 million on inventories written back to net realisable value," he said.
He said HLIB deemed the results to be above its expectations at 85% of full-year forecasts but within consensus at 75%.
He commented that the key variance against HLIB’s forecast was due to better-than-expected performance from PetChem’s fertiliser and methanol segment, which was buoyed by higher production volumes throughout the quarter.
Meanwhile, CGS-CIMB’s Raymond Yap said that PetChem’s 3QFY2022 earnings came in below its earnings at 67% of the previous full-year forecast, as compared to 78% of Bloomberg’s, as a result of weaker-than-expected profits at the group’s olein and derivatives (O&D) and fertilisers and methanol (F&M) divisions, as selling prices softened more than expected in 3QFY2022.
“Both the O&D and F&M segments saw lower quarter-on-quarter (q-o-q) average selling prices — PE and MEG prices q-o-q due to weaker consumer demand for plastics amid the global cost-of-living crisis and weak polyester industry demand; methanol prices fell due to weak industrial demand; and urea prices fell q-o-q due to the resumption of Chinese exports and lower fertiliser application in response to the historically high prices,” he said.
The CGS-CIMB analyst noted that PetChem’s 3QFY2022 net profit was boosted by a RM276 million reduction in the present value of the group’s trade payables, as some suppliers to Pengerang petrochemical complex agreed to extend repayment terms.
“Excluding this RM276 million ‘finance income’, O&D 3QFY2022 core net profit declined by 40% q-o-q to just RM567 million, despite the increase in its utilisation rate to 101%, due largely to the q-o-q fall in average selling prices,” Raymond added.
CGS-CIMB’s Raymond said the research house downgraded PetChem from “hold” to “reduce” with a lower target price (TP) of RM8.37 from RM9.30.
“We downgrade PetChem to a reduce as we expect its core earnings per share (EPS) in FY2023 to fall 15% y-o-y and for FY2024 core EPS to decline by 6%,” he said.
Petrochemical bear cycle on the horizon
Along similar lines, HLIB’s Jeremie said that the research house's findings found that PetChem’s product spreads — high-density polyethylene (HDPE), low-density polyethylene (LDPE), linear low-density polyethylene (LLDPE), urea and methanol prices — have come off from their peaks in the first half of FY2022 (1HFY2022).
“With the imminent start up of new supplies globally (which has been delayed for two years owing to the Covid-19 pandemic), we strongly believe that the petrochemical upcycle is now behind us as product spreads are seen to be coming off their respective peaks,” he said, adding that a petrochemical bear cycle is expected in FY2023 in view of the normalisation of product spreads.
Jeremie noted that with the imminent normalisation in product spreads, PetChem’s profits will peak in FY2022 and decline in 2023.
“We advise investors to lock in profits and embrace the likely outcome of a petrochemical bear cycle in 2023,” Yap said, noting that HLIB has downgraded its call on PetChem from "buy" to "hold" with a lowered TP of RM9.20, from RM11.76 previously.
