Petronas Chemicals stock rating upgraded by Morgan Stanley on cycle bottom

Morgan Stanley upgraded Petronas Chemicals Group (PCHEM:MK) to Equalweight, raising the price target to MYR3.83, citing indications that the chemical cycle has bottomed out due to capacity closures and capex reductions across Asia. The firm noted that the industry's price-to-book multiple suggests significant capacity shutdowns are already priced in, and anticipates a potential multiple expansion for Petronas Chemicals, although an earnings inflection is still about a year away. The upgrade reflects a broader expectation of a brewing upcycle in the chemical industry after a prolonged downturn, despite Petronas Chemicals facing its own operational delays.

Analysis

Morgan Stanley has upgraded Petronas Chemicals Group (PCHEM:MK) to Equalweight from Underweight, increasing its price target to MYR3.83 from MYR3.62, signaling a potential trough in the chemical industry cycle. This assessment is underpinned by clear indications of capacity rationalization in Asia, including the mothballing or closure of over 4 million tons per annum of petrochemical capacity and significant capital expenditure reductions, with some companies cutting spending by approximately 80%. Furthermore, about two-thirds of these regional companies are reportedly looking to divest non-core assets. The industry's price-to-book multiple has contracted to 0.5x, suggesting that the market is already pricing in nearly a third of capacity being shut down or written down. For Petronas Chemicals, which has not been operating multiple aromatic capacities and faces a new cracker startup delay to 2026 (more than five years behind schedule), Morgan Stanley foresees potential for multiple expansion as the cycle turns. However, the investment bank cautions that an earnings inflection for the company is anticipated to be approximately 12 months away, despite describing the prolonged downturn as having 'all the signs of a brewing upcycle'.

Key Decisions for Investors

• Investors should interpret the upgrade to Equalweight as a signal of a bottoming chemical cycle and improving sentiment for Petronas Chemicals, though substantial earnings recovery may still require patience.
• Closely monitor Asian petrochemical capacity adjustments, capital expenditure trends among industry players, and inventory levels, as these will be key indicators validating the anticipated upcycle.
• Factor in the projected 12-month timeframe for Petronas Chemicals' earnings inflection point and its specific operational challenges, such as the delayed cracker startup, when assessing the timing and risk associated with an investment.