JG Summit Holdings Inc., the flagship of the Gokongwei Group, is planning a temporary shutdown of its petrochemical business in the hope of reducing its operational losses.
“Management noted that the petrochemical industry continues to face significant challenges, marked by continued softness in demand and diminishing margins,” said COL Financial Research Analyst Paolo Miguel Manansala.
COL Financial said JG Summit Olefins Corporation’s (JGSOC) difficulties in the industry “may be more structural than cyclical in nature as naphtha-based crackers are less favored compared to the more cost-efficient ethane crackers.”
“Furthermore, management is projecting that global demand for petrochemicals will only catch up to supply closer to the end of the decade. Adding to the pressure, polymer—a major by-product—has seen its prices drop, further crimping overall petrochemical margins,” Manansala said.
Amid the challenging environment, he said JG Summit has decided to implement a four-month commercial shutdown, starting January 2025, as they strategize on the best course of action for the petrochemical business.
He noted that JGSOC’s EBITDA losses for the first nine months of 2024 reached P3.8 billion, a significant increase from the P2.6 billion net loss during the same period last year.
“Management is actively exploring cost-cutting measures to reduce cash burn, providing the company with more time to identify a path to profitability or at least break even," Manansala said.
He added that management "has also looked into the possibility of optimizing production for its more profitable products, including aromatics, butadiene, and LPG trading, as JGSOC’s losses are limited to the polymer by-product."
If the shutdown pushes through, Abacus Securities Corporation said the impact will be felt beginning in the first quarter of next year, and this will “deplete its topline yet again but could lessen some of its losses.”
“This likely eliminates the possibility for a turnaround soon as conditions appear to be worsening for the petrochem business and will continue to drag JGS in the short to medium term,” it added.
COL Financial also said, “We believe that JGS will continue to be weighed down by its petrochemical business as the industry will likely remain weak for the foreseeable future..”
However, it noted that, “with the sharp drop in share price, we believe that the weaknesses shown by its petrochemical business and core subsidiaries have been largely priced in.
“Even if we assume zero value for their petrochemical business, transfer JGSOC’s substantial debt (P100 billion) to JGS, and use current market prices for each subsidiary, the company is already trading at a steep discount to Net Asset Value of 41.1 percent,” said COL Financial.