KUALA LUMPUR – AmInvestment Bank Bhd has maintained its Petronas Chemicals Group Bhd’s (PetChem) earnings forecast between financial years ending December 31, 2021 (FY2021) and December 31, 2023, at between 18% and 24% above consensus.
Even though petrochemical price trends were mixed amid the upswing in crude oil prices in the second quarter (Q2) of 2021, the investment bank remained bullish on PetChem’s earnings prospects given the strong correlation to its share price, as rising naphtha costs should eventually lift petrochemical product prices.
In a research note today, it said crude oil price rose 13% quarter-on-quarter (q-o-q) in Q2 2021, while polyethylene rose by only 4.0% q-o-q, which led to its five-year average discount to naphtha widening to 27%.
Nevertheless, other products improved more substantively q-o-q, namely benzene (+42%), paraxylene (+21%), urea (+16%) and methanol (+12%), it added.
“Hence, we expect these higher product prices to propel PetChem’s FY2021 forecast net profit by 2.6 times year-on-year to RM4.85 billion, which is similar to the normalised earnings achieved by the group in FY2018 when Brent crude oil averaged US$73 per barrel,” AmInvestment Bank said.
Given the one- to two-month time lag between product price movement and recognition in PetChem’s revenue, the investment bank expects the integrated chemicals producer’s earnings in the second half of 2021 onwards to stage a stronger delivery.
It said that Brent crude oil price is currently trading at or above the US$70 per barrel threshold, versus an average of US$69 per barrel in Q2 2021.
The investment bank also noted that PetChem has entered a fresh three-year cycle of high plant turnaround and maintenance activities in Kerteh, Gebeng, Labuan and Bintulu, and capital expenditure in FY2021 is expected to rise by 73% year-on-year to RM2.6 billion from RM1.5 billion in FY2020.
“Notwithstanding the higher turnaround activities, the management is maintaining the plant utilisation rate target of over 90% across the next three years versus 90% in Q1 2021,” said AmInvestment Bank.
With product prices currently on an upswing, the investment bank expects PetChem’s jointly-owned Pengerang Integrated Complex petrochemical plant in Johor to break even at pre-tax levels.
“Assuming an operating margin of 10%, we estimate that the Pengerang division together with its wholly-owned isononanol plant – which costs US$442 million (RM1.87 billion) – could add a slight RM70 million annually upon full commencement to the group’s pre-tax profit,” it added. – Bernama, August 12, 2021
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