Results below expectations; D/G to SELL
TTNP’s 1Q22 results were disappointing as higher feedstock costs
continued to exact a toll on product spreads. With lower expected
contributions from its US associate moving forward coupled with multiple
margin-centric headwinds, we have slashed TTNP’s FY22-24 EPS estimates
by 46%/41%/30% and downgraded it to a SELL with a new TP of MYR1.75 (-
23%), albeit pegged to an unchanged 3.7x FY23 EV/EBITDA multiple (LT
Mean). PCHEM (BUY, TP: MYR11.20) remains our preferred sector pick.
Headline numbers boosted by one-off disposal gain
Stripping out unrealised forex losses of MYR5.8m and a one-off MYR45.7m
disposal gain from transfer of 3.2% equity interest in LACC to Eagle US
(TTNP’s share at 40%), its 1Q22 core PATMI came in at MYR63.7m (-85%
YoY; -29% QoQ). The results were below expectations, at 20%/21% of
our/the street’s full-year earnings forecasts. The miss was primarily due
to margin compression from surging feedstock costs, in-line with higher
crude prices.
Higher ASPs but product spreads narrow
Key takeaways from 1Q22 results: (i) higher turnover (+17%/+3% YoY/QoQ)
as improving blended ASPs (MYR5,297/t vs. MYR4,570/t in 1Q21 and
MYR5,046/t in 4Q21 respectively) more than mitigated for lower plant
utilisation of 85% (88% in 1Q21/4Q21); (ii) EBITDA margins continued to
narrow by -22 ppts/-1 ppt YoY/QoQ from higher actualised naphtha prices
(spreads calculated with a 6-week time lag for feedstock costs); and (iii)
the bottom-line was lifted by deferred taxation due to a subsidiary’s
recorded loss in the quarter (1Q22 eff. tax rate of 8% vs. 24% in 1Q21).
Product margins currently below breakeven levels
As alluded to in our previous report, FY22 is set to be challenging as
product spreads are likely to compress further as (i) higher feedstock costs
catch-up with front-running ASP gains and (ii) TTNP’s domestic premium
(c.USD50-100) is likely to erode with PCHEM’s entry into the down-stream
market for HDPE/LLDPE/PP via PIC’s impending start-up. With PP/HDPE
margins currently below EBIT breakeven levels (c.USD500/USD350
respectively) and closing in on its March 2020 lows (see Fig. 5), we slash
TTNP’s FY22-24 earnings estimates by 30-46% and D/G the stock to a SELL.