Shares of Petronas Chemicals Group, a Malaysian petrochemical company, took a hit on Wednesday as analysts expressed concerns regarding the company's outlook following a significant drop in its second-quarter net profit.

Share Prices Dip and Year-to-Date Losses Mount

The shares of Petronas Chemicals Group witnessed a decline of as much as 3.3% in early trading on Wednesday. Currently, the shares are 3.0% lower at 6.80 ringgit, contributing to the company's year-to-date losses of 22%.

Factors Influencing Second-Quarter Net Profit

Petronas Chemicals Group reported on Tuesday afternoon that its second-quarter net profit stood at MYR628 million ($135.1 million), compared to MYR1.87 billion in the same period last year. The decline can be attributed to lower product spreads and reduced profits from joint ventures and associates. However, the company experienced an 8% increase in quarterly revenue, reaching MYR7.11 billion. The growth was driven by higher sales volumes and the inclusion of revenue from a recently acquired subsidiary.

Challenging Outlook for Petronas Chemicals Group

In response to the company's performance, MIDF Research has cut Petronas Chemicals Group's target price to MYR6.72 from MYR7.04 while maintaining a neutral rating. The research firm cited a challenging outlook for the company, considering potential factors such as consumer spending trends and competition from other producers that may continue to impact global petrochemical demand. Additionally, there is a risk of oversupply in the market, resulting in downward price pressure, reduced profits, and decreased plant usage. Consequently, MIDF has revised its earnings forecasts for Petronas Chemicals Group, cutting the estimates by 28% for 2023 and 37% for 2024 due to the company's first-half earnings falling below expectations.

Petronas Chemicals Faces Earnings Visibility Challenges, Analysts Say

Analysts at Citi have maintained a sell rating on Petronas Chemicals due to concerns about limited earnings visibility in the specialties segment and subsidiary Perstorp. As a result, the company's 2023-2024 EPS estimates have been revised downwards by 6% and 9% respectively. However, the target price remains unchanged at MYR6.00.

Although Petronas Chemicals' share price has recently risen alongside the stabilization of the global urea price, analysts at Citi believe that further upside potential is limited. They point to China's strong urea production as a contributing factor.

While Citi analysts anticipate a modest on-quarter recovery for Petronas Chemicals' third-quarter earnings, they also highlight that the commercial startup of its Pengerang project in late-2023 might weigh on earnings due to expected weaker margins.

Similarly, Kenanga Investment Bank is cautious about the outlook for Petronas Chemicals. They expect the petrochemical market to remain weak due to a long-term supply glut. Therefore, Kenanga has maintained an underperform rating for the company, with an unchanged target price of MYR6.20.

Considering these assessments, it is clear that Petronas Chemicals is currently facing challenges in terms of earnings visibility. Both Citi and Kenanga express concerns about the company's future prospects in their respective reports.

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