Anticipated Pengerang Petrochemical Launch And Asian Expansion Set To Drive Revenue Growth

Key Takeaways

• Expansion in Malaysia and India could boost revenue and margins in both basic and specialty chemicals, despite initial operational costs.
  
• Increased plant efficiency and foreign exchange gains support improved earnings amidst global market challenges.
  
• Operational disruptions and financial challenges from market conditions and plant issues may impact revenue, net margins, and financial stability.

Catalysts

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

• The completion of performance tests and the anticipated full commercial operations of the Pengerang Petrochemical Company by the end of 2024 is expected to enhance capacity and contribute significantly to the group's basic chemicals business, potentially increasing revenue despite the initial capital-intensive impact on earnings.
  
• The planned start of commercial operation for the penta and calcium formate plant in India by the end of 2024 is aimed at increasing specialty segment capacity, which could lead to expanded market reach in the Asia Pacific and potentially improve revenue and margins in the Specialty Chemicals segment.
  
• Improved plant utilization rates, which increased from 85% to 89% year-on-year, suggest enhanced operational efficiency that is likely to support higher production volumes and thus increase revenue, even amidst global market challenges.
  
• The successful reversal of foreign exchange losses, as the U.S. dollar strengthens, could enhance earnings by mitigating previous losses attributed to currency fluctuations when the U.S. dollar weakened against the Malaysian ringgit.
  
• Continued strategic focus and completion of ongoing maintenance and turnaround programs, coupled with expected stabilization or improvement in market demand, particularly for fertilizers and methanol, suggest potential stabilization and growth in EBITDA and net income.

PETRONAS Chemicals Group Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PETRONAS Chemicals Group Berhad's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 7.6% in 3 years time.
• Analysts expect earnings to reach MYR 2.6 billion (and earnings per share of MYR 0.4) by about December 2027, up from MYR 768.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MYR 3.0 billion in earnings, and the most bearish expecting MYR 1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2027 earnings, down from 50.1x today. This future PE is lower than the current PE for the MY Chemicals industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 6.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.09%, as per the Simply Wall St company report.

PETRONAS Chemicals Group Berhad Future Earnings Per Share Growth

Risks

• The global manufacturing sector remains challenged, as indicated by recent PMI readings dipping below the 50-point threshold, suggesting contraction in production and new orders, which could impact future revenue growth.
  
• Weak demand, particularly from significant markets such as China, and a decline in crude oil prices have led to a decrease in the Chemical Index and product price performance, potentially putting pressure on revenue generation.
  
• Unexpected downtime in various segments and mechanical challenges encountered at major plants have led to operational disruptions, potentially impacting the company’s ability to maintain consistent production and sales volumes, affecting revenue and profit margins.
  
• The depreciation and interest expenses related to the Pengerang Petrochemical Company (PPC) are rapidly increasing, leading to a significant loss after tax impact, which strains earnings and net margins.
  
• Unrealized foreign exchange losses from revaluation of payables and shareholders' loans continue to impact EBITDA and group PAT, contributing to financial volatility and risk of reduced earnings.

Valuation

• The analysts have a consensus price target of MYR 5.04 for PETRONAS Chemicals Group Berhad based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR 6.2, and the most bearish reporting a price target of just MYR 3.78.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be MYR 34.0 billion, earnings will come to MYR 2.6 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 9.1%.
• Given the current share price of MYR 4.81, the analyst's price target of MYR 5.04 is 4.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.