• 4Q18 core earnings jumped 26% yoy to RM1.27bn on better JV contribution and lower tax rate, and drove 2018 core PATAMI up 22% yoy to exceed ours/consensus estimates at 110%/118%.

• A higher 2nd interim DPS of 18 sen was declared, bringing total DPS declared for 2018 to 32 sen, implying a 50% payout ratio.

• The chemicals market weakened significantly over uncertainties in trade tension and adequate supply. We trim our 2019 earnings by 12% to reflect the market weakness.

• Downgrade to HOLD with new DCF-derived TP of RM10.00 (from RM10.50). Look to accumulate at lower level.

Higher JV contribution and lower tax rate boosted profits

4Q18 core PATAMI grew 26% yoy to RM1.27bn mainly due to higher JV contribution of RM42m (4Q17: JV loss of RM43m) and lower tax rate at 12% (4Q17: 20%). This aided 2018 core PATAMI which grew 22% to RM5.1bn. Overall, it exceeded ours and consensus’ estimates at 110% and 118% respectively.

Higher production offset lower product spread

On qoq basis, 4Q18 core EBITDA grew 6% to RM1.46bn as higher PU more than offset the impact from lower product spread. 4Q18 PU recovered to 94% (3Q18: 79%) on lesser maintenance activities and brought 2018 PU to 92%. This is slightly higher than 2017 PU of 91%.

Higher dividend declared

A second interim DPS of 18 sen was declared (4Q17: 15 sen), bringing total DPS for FY18 to 32 sen (FY16: 27 sen). This implies a 50% payout ratio, in line with its dividend policy.

Moderating outlook

PChem expects plant performance to remain similar in 2019F with PU guided to be at 90%. Nonetheless, we note that prices of several key products (ie. polyethylene, methanol and urea) weakened significantly due to uncertainties in geopolitical tensions and adequate market supply. While crude oil price staged progressive recovery, we throw caution on potential prolonged weakness in the chemicals market. This prompt us to lower our 2019F earnings by 12% on lower product price assumptions.

Downgrade to HOLD with new DCF-derived TP RM10.00

We downgrade our recommendation to HOLD with a lower DCF derived TP of RM10.00 (from RM10.50) which implies 2019F PE of 17x before easing to 15x for 2020F. Our DCF assumes a WACC of 8.0% and LT growth rate of 0%. We think the weak chemical market could dampen sentiment towards the stock in the near-term; longer term outlook remains intact. Look to accumulate the stock on lower level.

Source: BIMB Securities Research - 26 Feb 2019