Maybank IB Research has unfavourable outlook for petrochemicals
KUALA LUMPUR: Maybank Investment Bank Research expects the upcoming 4Q19E core earnings to possibly miss its and market’s expectations.
It said on Thursday the sector’s outlook is unfavourable given the global overcapacity and uncertain demand growth.
“Maintain Petronas Chemicals (PCHEM) at BUY as we believe it could benefit from this downcycle by leveraging its strong balance sheet (c.RM9.3b net cash) to acquire high-margin specialty chemical businesses at attractive valuations. Downgrade Lotte Chemical Titan (LCT) to HOLD (from BUY) in view of the sector’s headwinds, ” it said.
The research house said both PCHEM and LCT will see weaker YoY earnings owing to the sharp fall in average selling prices (ASPs).
On a QoQ basis, naphta-based players, such as LCT, would see the biggest earnings drop as the weaker petrochemical ASPs coincided with an uptick in naphta price in 4Q19, leading to a margin squeeze.
That said, LCT’s bottomline could still be boosted by a substantial one-off disposal gain in 4Q19.
As for PCHEM, the research house expects its 4Q19 earnings to rebound QoQ on higher plant utilisation rate, but earnings may still disappoint vis-à-vis market expectations.
Maybank IB Research said YTD, the global ASPs have strengthened c.3% as some producers curtail their production in response to poor profitability.
Meanwhile, naphta spot price has fallen 9% YTD as US-Iran tension eases, implying improved spread off the end-2019 low.
“However, we see limited recovery in 2020E given the massive new supply from China/US, as well as closer to home at Pengerang and in Indonesia.
“There is also downside risk to global demand on a slower economy and global consumption shifting from single-use plastics. Just a week ago, China (c.30% of global demand) announced its plan to ban various single-use/non-degradable plastics through 2020-2025, ” it said.
Maybank IB Research said for PCHEM, it cut its FY19-21E EPS by 10-32% on lower ASP assumptions and also assume losses (vs. profit previously) at its Pengerang plants in FY20E.
“We derive our new TP of RM7.40 (-10%) as we roll forward our valuation to CY21E and maintain our 7.5 times EV/EBITDA target (-1SD to 5year mean). Dividend yield of 3.2% is also decent. Re-rating catalysts include strategic acquisitions at attractive valuations during this downcycle. Maintain BUY.
“For LCT, we cut our FY19-21E EPS by 20-57% on lower ASP assumptions and also assume lower earnings from its associate LC USA post the stake sale. We derive our new TP of RM2.20 (-23%) from rolling forward our valuation to CY21E and pegging the stock at 1.5x EV/EBITDA (from 6.1x; 2SD to 5-year mean). D/G to HOLD (from BUY), ” it said.
Source: TheStar