PetChem battered, but with chance of recovery

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According to MIDF Research, the recently announced 1QFY20 earnings by Petronas Chemicals showed an impact by low product prices and pullback in demand.

KUCHING: Although Petronas Chemicals Group Bhd’s (Petronas Chemicals) earnings for its first quarter of financial year 2020 (1QFY20) came in at RM506 million which was below consensus’ expectations at 13 per cent, analysts see a chance of growth coming from the full commissioning of the RAPID Pengerang project in the second half of the year.

According to MIDF Amanah Investment Bank Bhd (MIDF Research), the recently announced 1QFY20 earnings by Petronas Chemicals showed an impact by low product prices and pullback in demand.

“Comparing against 1QFY19, revenue and earnings during the quarter contracted by 5.8 per cent and 36.9 per cent year on year (y-o-y) primarily due to the pullback in demand following the worldwide Covid-19 health crisis coupled with soft product prices,” it said yesterday.

“Overall plant utilisation rate (PUR) of 94 per cent was recorded in 1QFY20, which was comparable to 1QFY19’s PUR of 95 per cent,” it added.

“This was despite the several turnaround maintenance activities that took place during the quarter mainly at PC Fertiliser in Bintulu and Labuan. Furthermore, PC Fertiliser Kedah as well as PC Methanol 2 have also completed their respective turnaround maintenance activities in 1QFY20.”

Segment wise, Petronas Chemicals’ olefins and derivatives segment reported a 100 per cent PUR during the quarter which was similar to 1QFY19. During the quarter, revenue was lower by 12.8 per cent.

This was mainly due to compressed margin arising from the weak global product prices.

“In addition, we understand that the segment’s revenue had also incorporated a RM146 million worth of revenue from the sales of excess molecules produced by refineries at Pengerang during the commissioning stage. The sales of these excess molecules make up about six per cent of O&D’s revenue and 3.75 per cent of Petronas Chemicals’ overall revenue.

“We understand that the sales of these excess molecules will be a recurring income for Petronas Chemicals Chem going forward with the commissioning of PIC but at a lower rate as some will be used for petrochemical productions,” MIDF Research said.

As for its fertilisers and methanol segment, it recorded a lower PUR of 90 per cent during the quarter versus 92 per cent in the same period last year mainly due to turnaround activities undertaken at several of its plants notably at its PC Methanol Plant 2, PC Fertiliser Bintulu, Labuan and Kedah.

This had resulted in lower production during the quarter. However, sales volume was higher due to product drawdown from inventory. Furthermore, the higher sales volume was negated also by the subdued product prices with revenue and earnings registering a decline of 7.8 and six per cent y-o-y respectively during the quarter.

These led MIDF Research to downgrading its recommendation on Petronas Chemicals to neutral from buy previously.

“Despite the downgrade, we have a positive bias on the company given that its fundamentals remain intact and we foresee some form of recovery in product prices given the recent performance of the crude oil price and the return of demand from refineries in China,” it added.

“In addition, several countries have started easing their respective Covid19 measures which we expect will translate to improved demand going forward. Furthermore, with the full-commissioning of RAPID Pengerang in 2HFY20, we are expecting PChem to start moving towards producing more differentiated and specialized products starting with the commissioning of PC Isononanol in Pengerang.”

Also, with the completion of its statutory turnaround activities, production volumes will be restored to pre-TA period and further ramp-up from Pengerang – which will be able to produce a wider product range (C2-C6) compared to Kerteh and Gebeng combined, will assist in arresting the impact from the subdued product prices if it lingers into next year.”