Petchem downgraded on further downside risks

PETALING JAYA: Weak third quarter results, which were dragged down by lower product prices, has led to a downgrade of Petronas Chemicals Group Bhd (Petchem) by Affin Hwang Capital Research.

The research house downgraded the stock to “sell” from “hold,” citing further downside risks from potential start-up losses in the Refinery and Petrochemical Integrated Development (Rapid) plant in Pengerang.

It noted that the prolonged trade tensions continued to take a toll on the group’s third quarter (Q3) results, resulting in its core profit for the period falling to levels not seen since Q2’15. Affin Hwang Capital Research added that its earnings per share (EPS) forecast was also 20% below street, hence the downgrade with a reduced target price of RM6.40 from RM7.81 previously.

Petronas Chemicals’ share price slumped by 42 sen, or 5.4%, to close at RM7.38 on Wednesday as investors reacted to the group’s weak Q3 performance.

Its Q3 net profit fell 54% year-on-year to Rm553mil from Rm1.21bil as average product prices decreased in tandem with declining crude oil prices and softer market demand.

This was despite its higher plant utilisation rate (PUR) of 81%, compared to 79% during the same quarter, a year ago.

In a filing with Bursa Malaysia, Petchem said revenue for the quarter had come in 24% or Rm1.2bil lower than the corresponding period last year, mainly due to the lower product prices. This, however, was partially offset by higher sales volume and the weakening of the ringgit against the US dollar.

Given a lacklustre near-term outlook, the research house also cut its FY19-FY21 earnings forecast by 8%-18% as it expects the group will continue to face weak petrochemical average selling prices.

MIDF Research, on the other hand, maintained its buy call on the counter.

“We remain sanguine on 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,” it said in a note.

The research house said the dip in Q3 revenue and earnings were expected as the group’s management has guided that the quarter would have the heaviest statutory turnaround (TA) activity.

Despite this, it noted that the group recorded a higher overall PUR.

“There is however, a double whammy impact on the group’s revenue and earnings coming from not only the heavy TA but also the subdued product prices during the quarter mainly due to the weak movement of crude oil price,” it said.

The research house maintained its earnings forecast as it anticipates that Petchem’s Q4 earnings will rebound to pre-ta levels. “This is due to the completion of all the statutory TA activities for Petchem as well as the recovery in crude oil price,” it said.