PCHEM ... Dec12

PetChem's Q3 FY12 earnings dropped 38% on-year, on the back of a 15% on-year revenue decline. The company’s 9MFY2012 net profit fell 12% year on year to rm2.6 billion.

The drop in revenue was due to lower product selling prices for its Olefins & Derivatives (O&D) division, as global manufacturing activities declined thus weakening demand.

Feedstock for PetChem's O&D division was limited as PetChem's supplier undertook a revamping exercise on one of the gas processing plants.

Other factors were weaker product prices for its fertilisers & methanol division due to weaker urea and methanol prices; and lower plant utilisation for its fertilisers & methanol division, due to maintenance for its plants.

Moving forward, the outlook for both divisions remain challenging on the back of continued uncertainties.

Its earnings outlook in 4QFY2012 and 1HFY2013 remains tough due to weak product prices and margins. Also a feedstock supply shortage still persists for both olefins and fertiliser groups. The positive impact from its cheap gas feedstock is unlikely to offset the weak earnings.

Its CEO and CFO presented a more gloomy earnings outlook for PChem in 4Q12 and 1H13. Negative surprises included the company’s more cautious outlook and the financial impact of the discontinuation of the vinyl business, resulting in a huge 4Q12 charge of RM560m. On the olefins and derivatives group, while utilisation is expected to improve from 3Q12 as gas feedstock will increase, it expects the weak margins to persist on the back of depressed product prices and rising costs. Fertiliser will see higher volume as there will be no major maintenance shutdowns in 4Q12. However product margins are likely to remain weak on low demand and rising supply.

Market observers remain negative on PChem's short-term margin outlook given the current (Dec 2012) weak industry margin visibility and challenging operations from continued feedstock shortages.

Earnings would recover by mid-2013 after industry supply cuts from high-cost producers.

With a challenging outlook and the limited upside near-term, near-term share price downside exists on potential consensus earnings downgrades for 2012-14 on the weaker margins and operation outlook.