KUALA LUMPUR (Feb 24): Shares of Petronas Chemicals Group Bhd (KL:PCHEM) fell on Monday following weaker-than-expected results, sparking warning from analysts that the tough times may continue this year.

Petronas Chemicals fell nearly 8% or 31 sen to RM3.83, erasing more than half of the stock’s gain last Friday. The stock was trading at RM3.84 at 9.45am, giving the petrochemical company a market capitalisation of RM31 billion. Trading volume totalled 3.2 million shares so far.

Analysts on Monday cut their earnings forecasts for Petronas Chemicals, with Hong Leong Investment Bank (HLIB) anticipating a marginal negative earnings before interest, tax, depreciation and amortisation (Ebitda) margin for Pengerang Petrochemical Company Sdn Bhd (PPC).

It also expects a trim in the olefin and derivatives segment's selling prices.

The research house cut its forecasts by 28% for the financial year ending Dec 31, 2025 (FY2025) and 24% for FY2026, and maintained its 'sell' call on Petronas Chemicals, with a lower target price of RM3.54, based on a historical five year price-earnings mean of 16 times FY2026 earnings per share.

"We expect the petrochemical sector to remain challenging, on the back of China’s aggressive capacity expansion drive, coupled with an unexciting demand outlook from the downstream sectors," the research house said in a note.

HLIB expects PPC to continue posting negative Ebitda in the coming quarter, due to lingering weakness in polymer and aromatics product spreads. 

However, product spreads for PPC are still positive for most products, and thus, PPC could break even if its utilisation rate is over 70%.

Without the special feedstock discount arrangement with Pengerang Refining Company Sdn Bhd (PRC), the house believes PPC may still recognise substantial losses given the lumpy depreciation and interest expenses of RM700 million.

"Not helping is Petronas Chemicals’ PPC operations that contribute a substantially higher depreciation and interest cost base that is not covered by PPC’s negative Ebitda contribution, thus resulting in heavy earnings dilution going forward," the research house said.

"Planned turnaround pipelines in 2025 are guided as such: Petronas Chemicals (PC) Fertiliser Sabah in 3Q2025 and PC low-density polyethylene, PC olefins and PC glycols in 4Q2025," the house added.

There are now five 'buy', six 'hold' and nine 'sell' calls out of 20 research houses covering Petronas Chemicals. The average target price is RM4.67, according to Bloomberg, suggesting a potential return of up to 16.5% in the next 12 months from the last price.

Separately, MIDF Research, which expects the downcycle for petrochemicals to continue into FY2025, revised its forecasts for Petronas Chemicals downwards by 5% for FY2025, 6% for FY2026, and 5% for FY2027. 

"This revision considers the FY2024 results, in addition to normalising the forecasts based on current market conditions for natural gas, and the potential additional operation costs involved in ongoing and new projects," it said.

"[This is] in addition to the trade tariffs imposed against China, which could impact petrochemical exports to divert from the US to Asia, further disrupting the market."

At the time of writing on Monday, shares of Petronas Chemicals were down 30 sen or 7.3% at RM3.84, giving the group a market capitalisation of RM30.64 billion. The counter is down about 21% this year.

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