PCHEM: Chemical Sector Faces Headwinds as Earnings Miss Projections
| Key Information Summary | |
|---|---|
| Investment Bank | TA SECURITIES |
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation | |
A leading chemical group reported a core net loss of RM11.0 million for the first nine months of FY25, significantly falling short of both TA Securities’ full-year core net profit forecast of RM750.4 million and consensus estimates of RM536.7 million. The disappointing performance was primarily attributed to weaker-than-expected demand, reduced sales volumes, and persistently soft product spreads, particularly within the Olefins & Derivatives (O&D) segment.
Performance Review
The Olefins & Derivatives (O&D) segment saw revenue increase by 21.2% quarter-on-quarter (QoQ), driven by a higher plant utilisation rate (90.0% vs. 85.6% in 2QFY25) and a 26.9% QoQ surge in sales volume. Despite this, LBITDA only narrowed from RM251 million to RM110 million in the preceding quarter, primarily due to a lower unrealised forex loss from the revaluation of payables, rather than core operational improvements.
Conversely, the Fertilisers and Methanol (F&M) segment experienced a 1.9% QoQ decline in revenue, linked to a 2.5% QoQ reduction in sales volume. However, EBITDA for this segment grew 3.8% QoQ, supported by improved product spreads for urea and ammonia.
The Specialties segment also saw revenue decline by 11.2% QoQ, following a reduction in sales volume. This led to a significant drop in EBITDA from RM153 million to RM49 million, reflecting lower contribution margins.
Challenges and Outlook
The research firm has substantially cut its FY25, FY26, and FY27 earnings forecasts by 93.0%, 36.6%, and 31.8% respectively. This revision reflects persistently weak O&D spreads and a generally softer demand outlook across its key markets.
For O&D, market sentiment remains cautious and bearish, with oversupply continuing to pressure prices. Ethylene faces rising supply as crackers return from turnaround, while downstream demand remains soft. MEG sentiment is weak amid resuming Chinese operations and reduced polyester production. Polyethylene prices are subdued due to additional capacities in China, an influx of US cargoes, and cautious purchasing trends. Paraxylene continues to be weighed down by high inventories in China, with recovery in PTA and PET demand remaining sluggish.
In the F&M segment, urea prices are expected to remain supported by Indian import tenders and ongoing export restrictions from China. Ammonia prices are lifted by tight regional supply in the Middle East and limited spot availability in Southeast Asia. The methanol market remains stable, anchored by gas curtailment in Iran and steady downstream demand in Southeast Asia.
Demand across the Specialties segment remains pressured by weak global macroeconomic conditions. The building and construction sector is notably soft, affected by weak property markets.
Analyst View and Recommendation
Following the significant earnings revision, TA Securities has reiterated its SELL recommendation for the company. The target price has been lowered to RM3.33 per share, from a previous RM3.51 per share, based on 7x CY26 EV/EBITDA with a 3% ESG Premium.
