• 3Q18 core earnings jumped 37% yoy to RM1.26bn on better product spread and lower tax rate. 9M18 core PATAMI rose 20% yoy, ahead of our estimates, at 86%, and consensus, at 88%.

• The crude oil price plunge sent ethylene-based (O&D segment) product price lower but higher PU as ethylene cracker operation normalises and firm F&M market should drive earnings.

• We mildly raised FY18-20F estimates by 3.5% to adjust for the lower MI charge off after PCG acquired the remaining stakes in PC Olefins and PC LDPE.

• Maintain BUY with unchanged DCF-derived TP at RM10.50. We look forward to structural earnings growth with commencement of the RAPID complex in 2H 2019.

Stronger product spread boosted profits

3Q18 core PATAMI grew 37% yoy to RM1.26bn mainly on improved product spread following the rise in ASP in tandem with the crude oil rally then. Additionally, earnings were also supported by lower tax rate at 5% (3Q17: 13%). Overall, 9M18 core PATAMI were ahead of ours at 86% and and consensus estimate at 88%. This was mainly due to lower-than-expected effective tax rate and MI charge off.

Weaker quarterly performance on heavy maintenance

On qoq basis, core earnings fell 8% on higher maintenance activities involving: i) 400k MPTA ethylene cracker and PE plant in Kerteh, ii) the fertiliser plant in Gurun, and iii) the Labuan Methanol Plant 2. Overall, group PU eased to 79% (2Q18: 95%). Still, 9M18 PU was outstanding at 91%. With only one maintenance in 4Q18 for the Asean Bintulu Fertiliser, it is on track to achieve full year 90% PU as guided.

Raise earnings forecast

We raise our FY18F/19F/20F earnings forecast by 3.5% respectively to account for lower minority interest in PC Olefins and PC LDPE. Both companies became wholly-owned subsidiaries after PCG acquired the remaining stake in 1Q18. With crude oil prices plunging over 20%, PCG guided that ethylene-based product prices (O&D segment) has follow suit; ethylene price fell to c.US$900/mt from the peak of US$1300/mt in 3Q18.

Higher volume and better F&M outlook to sustain earnings

We also expect higher utilization from O&D segment as operations normalises (after maintenance shutdown of its ethylene cracker), firm F&M market outlook as well as structural growth from the soon-to-be commissioned RAPID in 2019 to underpin earnings growth.

Maintain BUY recommendation

Maintain BUY with an unchanged DCF-derived TP of RM10.50 which implies FY19E PE of 16x before easing to 14.5x. Our DCF is based on WACC of 8.0% and LT growth rate of 0%.

Source: BIMB Securities Research - 19 Nov 2018