PCG benefiting from high feedstock prices
- We lift PCG’s selling prices in FY22-23F to be based on Brent crude prices of US$75-77/bbl (from US$60/bbl), with high feedstock costs providing support.
- Hence, we raise FY22-23F core EPS forecasts by c.30%. Reiterate Add with a higher TP of RM9.88, based on a CY22F EV/EBITDA multiple of 8x (mean).
- Potential rerating catalysts include our expectation for PCG to announce very strong results for 3Q21F (likely 22 Nov), as well as for 4Q21F and 1Q22F.
High feedstock prices very supportive of petrochemical prices…
High and rising feedstock costs have been one of the most important reasons for why petrochemical prices have been on an uptrend in recent weeks and months. Crude oil prices have been strong as OPEC+’s cautious pace of production increases has not kept up with the demand recovery, leading to five consecutive quarters of destocking, likely up to 4Q21F. The price spread between naphtha and crude oil has also widened due to competition for naphtha as gasoline blending feedstock and due to the very high prices for alternative feedstock such as LPG. Natural gas prices have also surged this year due to the demand recovery in Asia and the low inventories in Europe that were initially caused by the very long winter that stretched into Apr-May 2021, which was made worse by the slack in Russian gas pipeline deliveries. Coal prices have also been strong due to China’s clampdown on coal production earlier in the year on environmental and safety concerns, China’s ban on the import of Australian coal and an extended monsoon in Indonesia. Naphtha is a key feedstock for many petrochemical operations in Asia and Europe while natural gas and coal are feedstocks for the production of methanol, ammonia, urea and MEG.
… ensuring that PCG is on track for very strong 2H21F earnings
In general, high feedstock costs have the potential to lower the spreads against petrochemical selling prices. However, PCG has a highly-advantaged cost position because it purchases ethane gas feedstock at fixed prices while its methane gas feedstock is paid for based on its selling prices of methanol and urea. As a result, the strong selling prices of polymers, MEG, methanol and urea in 2H21F will flow down to PCG’s net profits without being eroded by high feedstock costs. The only exception is for PCG’s production of aromatics, which uses naphtha feedstock purchased at spot prices; spreads against naphtha have plummeted to historically-low levels but this is not a major part of PCG’s overall product portfolio. Prices of petrochemicals in 4Q21F are the highest they have been this year, likely ensuring very strong quarterly results for PCG. Looking forward into 2022F, we expect selling prices to moderate from high 2021F levels as petrochemical supply may exceed demand growth and as natural gas and coal prices look set to fall from 2Q22F onwards with potentially more energy supply on the horizon. However, if OPEC+ plays its cards right, crude oil and naphtha prices may still average higher in 2022F vs. this year; while this may reduce the margins of PCG’s upcoming Pengerang plants, the profitability of its Kertih plants will see robust support.