Broker: Maybank Investment Bank Berhad
Date of Report: July 8, 2025

Petronas Chemicals: Navigating Subdued O&D Spreads and ESG Challenges in 2025

Overview: Persistent Pressure on Olefins & Derivatives, Limited Upside Ahead

Petronas Chemicals Group Berhad (PCHEM MK), Malaysia’s leading integrated chemicals producer, is facing another challenging year as regional oversupply—particularly from China—continues to weigh heavily on its Olefins & Derivatives (O&D) segment. Maybank Investment Bank Berhad maintains a SELL recommendation, with a target price of MYR2.59, reflecting a 24% downside from the current share price of MYR3.39. The target price is based on a 15x price-to-earnings ratio, in line with the five-year mean for FY26E earnings.

O&D Spreads: No Recovery in Sight for 2025

– O&D spreads have weakened further in 2Q25, reaching multi-year lows last seen during the early pandemic period. – The ongoing supply glut, especially from new Chinese petrochemical complexes driven by self-sufficiency goals, is expected to keep spreads depressed through at least the second half of 2025. – Most naphtha-based petrochemical players in the region are currently loss-making. – Industry watchers are closely monitoring for signs of capacity rationalisation, but a sector turnaround does not appear imminent.

Currency Fluctuations: Impact of a Weaker USD on Earnings

– The USD/MYR rate weakened by 5% in 2Q25, ending June at 4.21 (versus 4.43 at end-March). – PCHEM marks-to-market its forex impact on a quarterly basis. – The 2Q25 results are expected to be negatively impacted by:

• Revaluation of PCHEM’s shareholder loans to Pengerang Petrochemical Company (PPC)
• Revaluation of PPC’s payables

– A shutdown at PRefChem, alongside declining O&D spreads, points to weaker quarter-on-quarter core earnings for 2Q25.

Potential Upside: Special Discounts from Pengerang Refining Company (PRC)

– With favourable gross refining margins (GRMs), PRC is expected to be profitable when operations resume in 3Q25. – PCHEM, which owns 50% of PPC, may benefit from a “special discount” in 2H25 if PRC’s profitability materialises. – This discount could subsidise PPC’s losses and offer some upside risk to current forecasts.

Shareholder Structure and Market Performance

– PCHEM is majority-owned by PETRONAS (64.4%), with significant stakes also held by the Employees Provident Fund (11.6%) and Permodalan Nasional Bhd. (5.2%). – Free float stands at 23.1%, with 8,000 million issued shares and a market capitalisation of MYR27.1B (USD6.4B). – Over the past 12 months, the share price has ranged from a high of MYR6.22 to a low of MYR2.80. – The stock has significantly underperformed both in absolute and relative terms:

• 1-month absolute: +4%, relative: +3%
• 3-month absolute: +15%, relative: +8%
• 12-month absolute: -46%, relative: -43%

Financial Performance and Forecasts

– While revenue and EBITDA are forecast to remain stable, net profit and margins are expected to be subdued in FY25E, with only a moderate recovery in FY26E and FY27E.
– Core EPS is projected to rebound by 53.3% in FY26E after a sharp drop in FY25E.

Key Risks and Sensitivities

– Upside risk from any abrupt increase in polymer, urea, methanol, and ammonia prices. – Downside risk from a sudden drop in crude oil and natural gas prices, which would lower utility costs. – Input cost volatility, especially marked-to-market ethylene feed into Pengerang plants.

Environmental, Social, and Governance (ESG) Performance

ESG Risk Score and Overview – PCHEM’s ESG risk rating stands at 19.2 (Low), with a score momentum of -3.4, indicating improvement. – The company’s ESG matrix score is 65/100, above the average threshold of 50. – No controversies have been reported.
Material Environmental Issues

• Scope 1 emissions (FY23): 5.96m tCO2e (virtually flat YoY)
• Scope 2 emissions (FY23): 1.38m tCO2e (down from 1.48m)
• GHG intensity (Scope 1 & 2): 0.71 tCO2e/tonne (up from 0.69)
• NOx emissions (FY23): 22.0k tonnes (up from 18.7k)
• SOx emissions (FY23): 0.17k tonnes (down from 0.19k)
• Wastewater discharge (FY23): 227.8 tonnes (up from 215.0)
• Share of renewable energy in operations: 0.5%
• Zero cases of environmental non-compliance from FY21–FY23

– PCHEM ceased disclosure of Scope 3 emissions in FY22 and FY23 but completed a baseline assessment in 2023 and is working towards further disclosure.
Governance Highlights

• Board comprises 8 directors, 50% of whom are Independent Non-Executive Directors; 38% are female.
• Senior management is seconded from PETRONAS.
• MD/CEO salary is 0.11% of FY23 net profit; Board salary is 0.22%.
• External auditor KPMG PLT has served for over a decade.

Social Metrics

• Women in workforce: 21.0% (FY23)
• Women in senior management: 30.8% (FY23, up sharply from 25% in FY22)
• Average training per employee: 11.1 man-days
• Local suppliers: 87% of total
• Lost time injury frequency (LTIF): 0.09 (improved from 0.17)

ESG Targets and Progress

– Some targets have been exceeded (energy intensity reduction), while others remain in progress (CSR outreach, net-zero).

Balance Sheet and Cash Flow Highlights

• Cash and short-term investments expected to rise from MYR9.3B (FY23A) to MYR13.6B by FY27E.
• Net cash position maintained throughout forecast period.
• Free cash flow yield projected to improve from 4.6% (FY25E) to 7.0% (FY27E).
• Capex to remain stable at MYR2.5B per year.

Key Ratios and Profitability Metrics

– Margins and returns are expected to remain compressed in the near term, with gradual recovery anticipated from FY26E onwards.

Conclusion: Outlook Remains Challenging Despite Defensive Features

PCHEM continues to demonstrate financial resilience and disciplined cost management. However, persistent O&D market headwinds, margin compression, and lack of near-term catalysts justify a cautious stance. The potential for a “special discount” from PRC and upside from GRMs are offset by structural oversupply and volatile forex. ESG progress is evident, but improvement in quantitative environmental metrics is needed.
Investors are advised to closely watch for any signs of sector rationalisation or a material change in regional supply-demand dynamics that could trigger a re-rating of the stock. For now, the SELL recommendation remains in place with limited upside expected for 2025 and a gradual path to recovery projected in the outer years.