Are we close to the cyclical earnings peak?
? 1Q22 core net profit outperformed at 33%/30% of our/consensus forecasts, due to the strength in petrochemical selling prices on high feedstock costs.
? While we upgrade our core EPS forecasts, we downgrade from Add to Hold as the petrochemical price upcycle may be nearing its peak, in our view.
? Our TP is lowered slightly to RM10.60, based on CY23F EV/EBITDA of 7x (-1 s.d. from mean), down from 8x previously (pegged to mean of 8x).
Another record-breaking quarterly profit in 1Q22
Core net profit of RM2.1bn in 1Q22 was up 5% qoq due to 1) higher selling prices for polymer products in the O&M division, and 2) lower depreciation as certain olefins assets at Kertih became fully amortised. These factors more than offset 1) significantly lower O&D production and utilisation due to turnaround activities at the olefins, derivatives and aromatics plants, 2) lower urea selling prices and higher maintenance costs, which pulled down F&M profits qoq, and 3) lower share of profits from associate BASF Petronas Chemicals due to lower spreads for oxo-alcohols and acrylic acid. PCG’s 1Q22 core net profit was its highest ever as part of its longest continuous upswing in profits, with PCG hitting new profit records for five consecutive quarters.
Outlook for 2Q22F strong, with likely sharp O&D profit recovery
The outlook for 2Q22F appears to be strong as well; while the 1Q22 utilisation at the O&D division was suppressed at just 75% due to intense turnaround activities, the 2Q22F utilisation should rebound to above 90%, in our view. Meanwhile, average polymer selling prices from 1 Apr to 20 May averaged higher compared to 1Q22 and the PX-naphtha spread has widened qoq, even though MEG selling prices so far this 2Q22F have weakened slightly qoq. A potentially strong set of O&D profits in 2Q22F may help offset possibly weaker qoq performance at the F&M division as the Sabah fertiliser plant and the Labuan Methanol Plant 2 are undergoing turnaround and the F&M division’s plant utilisation may drop from 1Q22’s 93% to below <80% in 2Q22F, according to PCG. Additionally, average selling prices for urea in 2Q22F have declined qoq, with buyers waiting on the sidelines due to the still-high price of urea. The good outlook for 2Q22F should support PCG’s share price in the near term.
The petrochemical price cycle may be reaching a peak soon
We downgrade PCG from Add to Hold; despite very strong cyclical earnings in 2021 that are likely to continue for a second year running in 2022F, we think the probability of weaker earnings in 2023F is rising given increases in petrochemical production capacity and supply and a potential slowdown in global consumer spending due to the squeeze on spending power from high inflation and rising interest rates, which could put pressure on petrochemical selling prices even if feedstock costs remain high. Upside risk: high feedstock costs may sustain high selling prices for longer than expected. Downside risk: potential margin compression for the PCG group arising from the impending start-up of PCG’s Pengerang facilities that have to absorb the high naphtha costs.