Perfectly poised for a stellar FY21

Improving FY22 outlook; Upgrade to BUY

We have turned positive on PCHEM’s near-to-mid-term earnings outlook, on the back of sustained price firmness in the F&M segment. The supply constraints in the global fertiliser market are not expected to ease until mid-2022 and as such, we raise our FY21-23 EPS estimates by 11%/20%/6%. We upgrade PCHEM to a BUY with a new TP of MYR9.70 (+11%), pegged to
an unchanged 9x FY22E EV/EBITDA (10Y mean). It also has a robust balance sheet with a net cash position of MYR12.6b (MYR1.58 per share) as at end- 2Q21 and offers an attractive FY21/22E dividend yield of 4.2%/3.3%.

ASPs in the F&M segment remain elevated

PCHEM’s F&M segment – the primary driver of its record-breaking 2Q21 (contributing 40%/51% of Group revenue/EBITDA), continues to be the shining light amidst tightening global supply and soaring ASPs. In 3Q21, ASPs for urea and ammonia were sequentially higher by 28% QoQ whilst methanol prices posted a modest 8% gain. Average methanol prices in QTD- 4Q21 however, has surged 19% as Chinese supply remains constrained, while urea/ammonia ASPs have thus far held on to their 3Q21 gains.

Supply constraints key to sustained upside

The current supply tightness in the global fertiliser market is a by-product of three conflating factors: (i) soaring natural gas prices (accounts for 75- 90% of fertiliser production costs) that has rendered production at key European plants unfeasible, (ii) the fallout from Hurricane Ida shuttering ammonia plants and delaying shipments from US Gulf Coast states, its main fertiliser production & trading hub, and (iii) the Chinese gov’s decision to instate export controls on fertiliser shipments effective 1st Nov, amidst growing demand domestically and from its neighbours, India & S. Korea.

Maintaining steady momentum towards 2022

Elevated ASPs in the F&M segment are not expected to subside until the summer of 2022, as supply chain disruptions continue to exacerbate strong demand from economies emerging out of lockdown. Coupled with firm ASPs in the O&D division and the absence of major turnarounds in 3Q21, PCHEM is on course to have an exceptional FY21. With PIC’s start-up on track in 4Q21, we are also sanguine about its prospects heading into FY22.