Rising Renewables And Regulations Will Challenge Petrochemical Resilience

Key Takeaways

• Global transition to renewables and regulatory pressure threaten long-term growth, compress margins, and drive up operating costs for PETRONAS Chemicals.
  
• Overreliance on aging assets and supply-demand imbalances increase maintenance risks, revenue challenges, and add volatility to future cash flows.
  
• Diversification into specialty chemicals, operational excellence, stable feedstock, and sustainability efforts are positioning the company for resilient earnings and margin growth.

Catalysts

An investment holding company, engages in production and sale of chemicals.

• The accelerating global push for renewable energy and sustainable materials is expected to steadily erode demand for petrochemical products, especially from large industrial buyers, directly threatening future top-line and volume growth for PETRONAS Chemicals Group Berhad over the coming decade.
  
• Intensifying global environmental regulations and the likelihood of higher carbon taxes will further drive up compliance and operating costs across PETRONAS Chemicals' facilities, resulting in long-term EBITDA margin compression and elevated capital expenditure to meet evolving standards.
  
• Supply-demand imbalances persist as major capacity expansions in China and the Middle East create a global supply glut, causing sustained downward pressure on average selling prices across core commodity and specialty chemical segments and challenging PETRONAS Chemicals' ability to maintain price realization and revenue growth.
  
• PETRONAS Chemicals' continued reliance on aging assets and slow progress in portfolio diversification relative to peers amplifies the risks of growing maintenance costs, more frequent unplanned plant outages, and the need for substantial future capital investment, which are expected to drag on net earnings growth and free cash flow generation.
  
• The company remains exposed to heightened geopolitical volatility, ongoing supply chain disruptions, and feedstock price risks associated with dependence on PETRONAS' upstream operations, all of which are likely to add persistent volatility to net margins and undermine the predictability of future cash flows.

PETRONAS Chemicals Group Berhad Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on PETRONAS Chemicals Group Berhad compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming PETRONAS Chemicals Group Berhad's revenue will decrease by 1.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.6% today to 5.8% in 3 years time.
• The bearish analysts expect earnings to reach MYR 1.6 billion (and earnings per share of MYR 0.21) by about August 2028, up from MYR -1.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, up from -20.8x today. This future PE is greater than the current PE for the MY Chemicals industry at 13.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.53%, as per the Simply Wall St company report.

PETRONAS Chemicals Group Berhad Future Earnings Per Share Growth

Risks

• As operational efficiency and plant utilization rates have significantly improved year-on-year-rising from 85% to 91% for the group and as high as 99% in key segments-continued focus on operational excellence and reliability could support higher production volumes and stabilize earnings over the long term.
  
• Despite current market weakness, PETRONAS Chemicals is actively diversifying into specialty chemicals through acquisitions such as O2 Chemicals and commissioning new capacity in India, which could lead to a more resilient revenue base with higher margins, enhancing the company's long-term earnings power.
  
• The company's integration within the larger PETRONAS value chain provides a stable feedstock supply, which can help mitigate input cost volatility and support more predictable margins and cash flows even during industry downturns.
  
• Strategic cost management initiatives and digitalization, coupled with targeted sustainability efforts (energy efficiency, green electricity procurement, and carbon reduction), are likely to improve EBITDA margins and make the company better positioned for tightening environmental regulations-potentially preserving long-term profitability.
  
• Exposure to the Asia-Pacific region, where economic and industrial activity remains robust compared to lagging Western markets, enables PETRONAS Chemicals to benefit from secular demand growth for petrochemicals and specialty chemicals, which could consistently support revenue growth in the coming years.

Valuation

• The assumed bearish price target for PETRONAS Chemicals Group Berhad is MYR2.18, which represents two standard deviations below the consensus price target of MYR3.47. This valuation is based on what can be assumed as the expectations of PETRONAS Chemicals Group Berhad's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR4.7, and the most bearish reporting a price target of just MYR2.18.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MYR28.2 billion, earnings will come to MYR1.6 billion, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 9.5%.
• Given the current share price of MYR3.56, the bearish analyst price target of MYR2.18 is 63.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.