It has been a tough three years for Petronas Chemicals Group Bhd (PetChem), the leading petrochemical group in Southeast Asia.
The group was facing a downcycle in the chemical industry that suppressed product pricing over the past three years. The already-harsh operating environment worsened with the outbreak of Covid-19 and crude oil prices collapsed to sub-zero at one point.
As a result, PetChem’s earnings declined in FY2019 and FY2020 ended Dec 31. FY2018 was a good year, however, as the group’s profit after tax (PAT) jumped nearly 15% to RM4.78 billion from RM4.16 billion in FY2017.
Nonetheless, the industry downcycle sent its earnings downwards in the following two years. PetChem’s PAT fell rather sharply to RM2.81 billion in FY2019, and further to RM1.62 billion in FY2020.
“The crash in oil prices impacted the petrochemical industry, as petrochemical prices are strongly linked to crude oil prices. In the second quarter of 2020, sectoral demand dampened due to disruptions in manufacturing from Covid-19-related challenges,” says PetChem managing director and CEO Datuk Sazali Hamzah in the company’s latest annual report.
The earnings contractions drove down PetChem’s share price from RM7.30 on March 31, 2018, to a low of RM4.18 in mid-March 2020. The selldown in the first quarter of 2020 was compounded by the pandemic.
Nonetheless, its share price staged a strong rebound after the global equity rout. Apart from bargain-hunting activity after the big drop in share price, the recovery in petrochemical prices also helped fuel the upward trend.
PetChem’s share price surged to RM7.68 on March 31, 2021. The stock gained 5.2% during The Edge Billion Ringgit Club’s review period of March 31, 2018, to March 31, 2021. Meanwhile, the share prices of its big-cap peers had yet to return to pre-pandemic levels.
Despite the declining earnings, PetChem shareholders were rewarded with regular dividends, albeit lower as a result of the decline in PAT.
The group declared a dividend per share (DPS) of 32 sen in FY2018, 18 sen in FY2019 and 12 sen in FY2020 — a total DPS of 62 sen over three financial years. This translates into a three-year compound annual growth rate of 1.7% — the highest among companies with a market capitalisation above RM40 billion.
Looking ahead, the prices of chemical and petrochemical products are expected to rise further in the next few quarters, buoyed by already-high and still-increasing crude oil prices and supply chain bottlenecks brought about by the pandemic.
This augurs well for PetChem’s earnings prospects. In fact, its latest results have reflected the recovery.
For the nine months ended Sept 30, 2021, the group’s PAT leaped several fold to RM5.28 billion versus RM1.16 billion a year earlier. Revenue grew nearly 53% to RM16.04 billion from RM10.5 billion previously. The greater cheer is that PetChem declared a total dividend of 66 sen per share for the nine-month period.
Analysts covering the stock have a consensus target price of RM9.33 over the next 12 months.
Hong Leong Investment Bank Research analyst Jeremie Yap upgraded PetChem in mid-October to a “buy” call from a “hold” and assigned a target price of RM10.65. According to Yap, PetChem is expected to deliver strong earnings in the second half of the year, with its performance lifted by both the firm product spreads for its olefins and derivatives (O&D) segment, as well as skyrocketing urea and methanol prices.
“Based on our tabulation from Bloomberg data, we find that average polyethylene product prices remained somewhat firm, with a slight decline of about 3% to 9% in 3QFY2021 from 2QFY2021. With that, we will not be surprised should there be a slight decline in profit contribution quarter on quarter from PetChem’s O&D segment in 3QFY2021,” he comments.
Meanwhile, Sean Lim, an analyst with RHB Research, says PetChem’s plant utilisation is expected to improve to 97% in the third quarter of 2021, from 94% in the first half. The average plant utilisation rate could be higher than the earlier management guidance of 93% to 94%, as the group has postponed the turnaround of some plants to the second quarter of next year to ride the favourable average selling prices of petrochemicals, he adds.