Highlights

Chemical Company of Malaysia - A Rapid Turnaround in Fortunes

Date: 04/03/2019

Source  :  HLG
Stock  :  CCM       Price Target  :  3.08      |      Price Call  :  BUY
        Last Price  :  1.90      |      Upside/Downside  :  +1.18 (62.11%)
 


FY18 revenues of RM395.9m (+6.8% YoY) translated into core PATAMI of RM31.2m (FY17:RM3.2m) coming in above expectations. The stock is currently trading at an attractive FY19-20 PER of 8.2x-7.6x with an implied dividend yield of 6.1%-6.6%. CCM remains an underappreciated proxy to the glove sector and RAPID integrated petroleum complex. Its turnaround and growth story remains intact. Maintain BUY and TP of RM3.08.

Above. FY18 revenue of RM395.9m (+6.8% YoY) translated into core PATAMI of RM31.2m (+772%YoY) which accounts for 105% of our full year estimates. We deem the results to be above our expectations. The improved results are fruits of (i) the de gearing efforts (-19% reduction in finance costs YoY) and (ii) lower admin expenses on the back of the restructuring exercise (-27% YoY).

Dividend. Declared a final dividend of 2 sen/share (YTD: 9 sen/share) representing a payout of 49% yielding 4.6%.

QoQ. Revenue grew to RM100.5m (+5.7% QoQ) attributed namely to higher volumes from the chemicals division. Adjusting for an impairment of c.RM0.7m from polymer division’s asset, PBT was flattish coming in at RM10.3m (from RM10.9m) whilst margins slid by 1.2ppts (from 11.4%) due to the lower average caustic prices (c.-14% QoQ based on the prices we tracked). Effective tax rate was positive QoQ on the reversal of previous over-provisions. Consequently, core PATAMI improved to RM7.5m (from RM3.5m) QoQ.

YoY. Revenue declined 8% YoY (from RM109.2m) on lower ASP from the chemicals division (revenue:-9.3% YoY) despite the higher volumes sold (caustic soda p -45% YoY from USD682 DMT in 4Q17 to USD376 DMT in 4Q18). PBT improved by 35% to RM9.6m (from RM7.1m YoY) on the back of lower overheads and finance costs (-40.3%% YoY). A tax write back of RM0.136m resulted in ore PATAMI improving to RM7.0m after adjusting for EI amounting to -RM1.5 (FX, write-backs and impairments) from (4Q17:-RM7.8m). The group pared down the bulk of the remainder of their borrowings in December.

YTD. Group revenue grew 6.8%% YoY to RM395.9m on the back of higher volumes from both chemical and polymers division despite ASP pressure from the volatile commodity prices. The de-gearing efforts (-19% reduction in finance costs YoY) and lower admin expenses on the back of the restructuring exercise (-27% YoY) resulted in core PATAMI improving by over c.9x (from RM3.2m to RM31.2m). Note that the groups net-gearing position has improved from 1.10x in FY17 to 0.18x at end FY18.

Caustic prices. Regarding the BIS (Bureau of Indian Standards) certification issue, we understand that some of the smaller exporters have achieved this certification recently and we remain optimistic that prices will normalize by end 1Q19 early 2Q19. Note that Indian imports account for c.20%-25% of caustic soda export volumes from North Asia and as such uplift in the import ban will result in significant upside risk to prices.

Forecast. Despite the stronger than expected results, we leave our forecast unchanged as we adopt a more prudent stance.

Maintain BUY, TP: RM3.08. Our TP is a function of FY19 EPS of 23.7 sen pegged to a PE multiple of 13x. The stock is currently trading at an attractive FY19-20 PER of 8.2x-7.6x with an implied dividend yield of 6.1%-6.6%. CCM remains an underappreciated proxy to the glove sector and RAPID integrated petroleum complex. At this juncture the turnaround and growth story remains intact.

Source: Hong Leong Investment Bank Research - 4 Mar 2019

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