Can PetChem reclaim its lustre?

GLOBAL petrochemical players are in the doldrums, having to deal with excess capacity and slowing demand.

The situation is no different for Bursa Malaysia-listed players such as PETRONAS Chemicals Group Bhd (PetChem) and Lotte Chemical Titan Holding Bhd (LCT).

PetChem was once a favourite among yield investors, paying dividends of 56 sen or a 6.2% yield in financial year 2021 (FY21) and 41 sen or a 9.9% yield in FY22.

However, as the company continues to see declining net profit since FY22, it slashed its dividend payout to 13 sen or a 3.1% yield for FY23 and FY24.

Investor sentiment has soured, especially among foreign investors who have pulled out millions of ringgit from the counter.

Even major shareholder, the Employees Provident Fund, has disposed of about 1% of its shareholding in PetChem this year, reducing its holdings to 11.5%.

If this selling trend continues, then PetChem’s share price may not be able to see a positive upturn anytime soon.

Once a high-flyer, PetChem surged close to RM10 in May 2022 from a Covid-19 low of RM3.47 in March 2020.

Now, the stock is inching towards a five-year low, having dipped to RM3.61 on Feb 25.

In the past year, it has lost almost half its value to close at RM3.78 on Feb 27.

However, some investors are unwavering in their belief that PetChem will recover in due time, finding the currently depressed share price an opportunity to accumulate.

So, what should investors do when share prices of petrochemical companies have dropped to Covid-19 levels? Should they start accumulating, or is this a value trap?

What’s compelling about PetChem is its strong cash pile of RM9.93bil as at Dec 31, 2024.

That said, this cash reserve has been depleting due to rising working capital needs such as fuel and feedstock costs.

In FY21, the company held a staggering RM16.39bil in cash and cash equivalents.

PetChem managing director and chief executive officer Mazuin Ismail tells StarBiz 7 that the cash pile would come in handy should it enter into any mergers and acquisitions (M&A).

“Our cash will be allocated for dividend payments and to fund future growth projects, primarily within our specialties segment.

“We remain open to potential M&A that will complement and strengthen our product portfolio,” he explains.

As it is, analysts have turned negative on PetChem following its FY24 results, lowering their FY25 earnings forecasts after the company posted a core net loss in the fourth quarter (4Q24).

This dragged full-year net profit down 30.7% year-on-year (y-o-y) to RM1.18bil.

The negative variance was primarily due to weaker-than-expected product spreads and higher-than-expected operating costs.

TA Research says it has lowered the group’s core net margin assumptions for FY25-FY26 by three percentage points to reflect higher feedstock costs and increased operational expenses.

Additionally, rising shipping costs, particularly for methanol, will further weigh on overall margins.

Impairment risk

Analysts expect PetChem to report a y-o-y decline in profit for FY25, after incorporating Pengerang Petrochemical Co Sdn Bhd’s (PPC) losses of up to RM600mil, as well as the risk of asset impairment for Pengerang.

“Regarding PPC, while we experience some challenges for the startup, we have been making good progress with the completion of all performance test runs and commencement of commercial operations achieved in 2024.

“As disclosed in our 4Q24 Bursa (Malaysia) report, there is no impairment made on PPC at PetChem level. Nevertheless, the risk of impairment for PPC is particularly notable, as it has yet to reach its desired utilisation rates,” Mazuin explains.

Given the bleak operating environment, will PetChem be able to regain its lustre?

Mazuin does not paint a rosy picture of the current situation, but believes PetChem’s strong fundamentals will help it navigate this challenging period.

He is confident that the company’s agility will allow it to adapt to market changes and capitalise on the eventual recovery.

He explains that the dynamics of the chemical sector are determined by a combination of factors.

For PetChem, its results are primarily influenced by global economic conditions affecting population supply and demand, the prices of chemical products which closely correlate with crude oil prices, and utilisation rate of its production facilities.

“On our part, despite challenges faced earlier in the year, we successfully met our operational targets, with plant utilisation in the olefins and derivatives and fertilisers and methanol segments exceeding 90%. The specialties segment saw improved sales.

“Looking ahead to 2025, market conditions are expected to remain unchanged. For PetChem, we will remain focused on ensuring safe and efficient operations, keeping a close eye on the market and strengthening our financial discipline,” he adds.

Pressure on prices and margins

The petrochemical sector appears to be in an L-shaped recovery, and with significant capacity additions coming onstream over the next few years, it’s unlikely that the sector will revisit its average selling prices’ (ASPs) previous highs anytime soon.

Mazuin agrees, noting that while short-term price fluctuations are possible, ASPs are unlikely to return to the highs seen in 2021 and the second half of 2022 in the near future.

“Oversupply and prolonged slow demand are expected to continue exerting downward pressure on prices and margins.

“The extent to which ASPs remain depressed will depend on several factors, including global economic growth, which could boost demand for petrochemical products and support prices; demand from key sectors such as construction, automotive and packaging; and geopolitical factors like trade wars or political instability, which could disrupt supply chains and impact prices.

“We are seeing several industry players responding to these challenges by undertaking capacity rationalisation and cutting back on their operating rates.

“We believe there is potential for further consolidation within the industry, which could create a more balanced supply and demand dynamics. This would, in turn, improve product prices and profit margins,” he adds.

LCT, for instance, has shut down one of its two naphtha crackers in Pasir Gudang, Johor, on Dec 15, 2024, which Mazuin points out has alleviated the oversupply situation in the region.

“This development has provided PetChem with an opportunity to capture a larger market share, particularly in Malaysia,” he says.