PetChem faces near-term headwinds, recovery likely in second half
KUALA LUMPUR: Petronas Chemicals Group Bhd's (PetChem) earnings are expected to remain subdued in the second quarter of financial year 2025 (2QFY25), with a significant recovery anticipated only in the second half of 2025 (2H25).
Urea and methanol prices, which had earlier contributed commendably to the group's performance, have eased going into 2Q25 as earlier supporting factors, including stronger feedstock prices and supply constraints, have gradually dissipated.
As such, Hong Leong Investment Bank Bhd (HLIB Research) expects the group's fertilisers and methanol segment to record softer earnings in the coming quarter.
The research house also expects the olefins and derivatives (O&D) division to remain under pressure in 2Q25, as ongoing feedstock disruptions at Petrochemicals Company Sdn Bhd (PPC) and utility supply issues in Kertih continue to weigh on the segment's profitability.
In addition, polyolefin prices are expected to trend lower, amid a potential demand slowdown triggered by the United States' sweeping tariffs and a recent decline in oil prices that has reduced naphtha feedstock costs.
"In light of the operational hiccups in Kertih and PPC, we expect PCG's bottom line to stay depressed in 2QFY25 and will only stage a meaningful recovery in 2H25," it noted.
HLIB Research has maintained a 'Sell' call on PetChem, with a lower target price of RM2.50.
The firm expects the petrochemical sector to remain challenging on the back of China's aggressive capacity expansion drive, coupled with unexciting demand outlook from the downstream sectors.
"Not helping is PCG's PPC operations, which contribute a substantially higher depreciation and interest cost base that is not covered by PPC's negative earnings before interest, tax, depreciation, and amortisation contribution, thus resulting in significant earnings dilution going forward," it said.
In line with this, HLIB Research has also lowered its FY25 and FY26 earnings forecasts by 38 per cent and six per cent, respectively, and introduced an FY27 forecast of RM1.8 billion.
PetChem recorded subdued 1Q25 core earnings of RM79 million which came in below HLIB Research's and street estimates at five per cent of FY25 forecasts.
Core earnings dropped 84 per cent year-on-year (YoY) as O&D business slipped into negative territory.
The earnings shortfall was attributed to extensive operational disruptions in the O&D segment, affecting both PPC and Kertih.
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