Given the sharp drop in demand from China, the group is not expected to readily redeploy its output to other regions

By SHAZNI ONG

LOWER oleochemical prices, poor demand from China and reduced plant utilisation rate combined could exert pressure on Petronas Chemical Group Bhd’s (PetChem) earnings for financial years 2020 to forecast 2022 (FY20- FY22F)

“Given the sharp drop in demand from China, which accounted for 18% of PetChem’s FY19 production volume, we do not expect the group to readily redeploy its output to other regions which are also currently experiencing the same viral outbreak,” said AmInvestment Bank Bhd analyst Alex Goh.

OPEC+’s production cuts, which stem from limited storage capacity, provide some relief but unlikely to be sufficient to offset the drastic fall in oil consumption.

“Hence, we expect PetChem’s share price to drop further as it currently trades at a price-to-book ratio (P/BV) of 1.3 times, above its all-time low P/BV of 1.1 times last month.

“PetChem currently trades at a high FY20F enterprise value/Ebitda of 12 times versus its two-year average of 7.6 times with unexciting dividend yields of 2%,” he said in a research note yesterday.

Goh said PetChem’s management had earlier guided for plant utilisation (PU) rates to be higher than the 92% level achieved in FY19 due to lower turn-around days, with only units in Gebeng and Labuan scheduled to undergo 30-to 40-day turn-around activities in this year’s first quarter (1Q20) and 3Q20 respectively.

“We view this as unlikely as limited storage facilities, together with reduced offtake from customers, could mean production volume would need to be scaled back. Hence, we maintain our FY20F-FY21F PU assumptions at 85%-88% for now,” he said.

Goh noted that petrochemical prices have decreased in tandem with the crude oil price downturn, stemming from the unprecedented global demand plunge dampened by the Covid-19 pandemic amid the expiry of the OPEC+ production quota agreement, following the Saudi-Russia quota discord.

“Demand for olefin products has already softened earlier by the unresolved US-China trade war which began last year.

“Since the beginning of the year, Brent oil price has fallen by 59% while naphtha decreased by 67%, benzene 70%, ethylene 37%, paraxylene 30%, methanol 22% and polyethylene 12%.

“Only urea, which is used in the agriculture sector, registered a 23% increase in prices due to production outages in China,” he said.

Goh opined polyethylene prices are likely to decrease further due to the two-to three-month lag differential between naphtha spreads and contracting oleochemical margins dampened by weak demand.

“Oleochemicals and derivatives accounted for 41% of PetChem’s FY19 profit after tax with the rest from fertilisers and methanol.

The firm has maintained a ‘Sell’ call on PetChem with an unchanged forecast and fair value of RM3.25 per share, pegged to a 10% discount to FY20F book value.

PetChem’s shares closed unchanged at RM4.82, valuing the petrochemical products producer at RM38.56 billion.