KUALA LUMPUR: Hong Leong Investment Bank Bhd's (HLIB) research has cut Petronas Chemicals Group Bhd's (PetChem) earnings forecast for financial year 2023 (FY23) by 17.8 per cent on lower average selling price (ASP) and utlisation rates for both Fertilisers & Methanol (F&M) and Olefins & Derivatives (O&D) segments.
It has also cut earnings estimates for FY24 and FY25 by 9.4 per cent and 12.5 per cent
HLIB research maintains its Sell call on PetChem, but with a higher target price of RM6.11, from RM5.40 previously.
PetChem's earnings for the full year fell below both HLIB research's forecast of 61 per cent and the consensus estimate of 62 per cent.
The group recorded a third quarter ended Sept 30, 2023 (3Q23) core d profit after tax and minority interests (Patami) of RM413 million, bringing the cumulative nine months of FY23 (9M23) sum to RM1.61 billion.
HLIB said the key variance against its projections was attributed to a lower-than-expected ASP and utilisation rate, which resulted from unplanned shutdowns and maintenance activities affecting both O&D and F&M segments.
"After a short-lived rebound in polyolefin prices in 3Q23 (mainly due to rising feedstock costs and China's Golden Week Holiday), bearish sentiment is likely to persist as bleak global economic outlook of key regions such as Europe and China continue to weigh on downstream demand.
"Not helping is the continued global capacity expansion exacerbating the supply glut with additional 7.0 metric tonne production capacity of polyethylene (PE) and polypropylene (PP) in 2023, with China accounting for half of the capacity additions while further supply growth is expected in 2024," it said in a note.
For F&M, HLIB said Middle East urea price improved 10 per cent quarter-on-quarter in 4Q23 and the price should remain stable, supported by the collapse of the Black Sea Grain Deal and uncertainties over China's export quotas, albeit demand outlook remains bleak.
With the overall utilisation rate expected to improve in 4Q23, over 85 per cent, after a slew of unplanned turnarounds and maintenance works, the investment bank expects better QoQ earnings in 4Q23 on the back of a flattish O&D but better F&M.
Separately, it said operations in Pengerang Integrated Complex (PIC) are expected to achieve commercial operation date (COD) by 1Q24 and hence, we expect the consolidation of depreciation and interest expenses amounting to RM400 million to RM500 million per annum to likely kick in next year.
"On a better note, Petronas Chemicals has been granted the extension for the existing ethane and propane supply contract for one of its crackers, which was initially expected to be renewed by the end of 2023. "The existing terms and conditions will remain in force for another year until the end of 2024.
"We believe the renewal of this contract post-2024 will entail higher feed-stock costs," it added.