• 1Q19 core earnings declined 29% yoy and 32% qoq to RM868m mainly on lower ASP and product spread. Overall, core earnings trailed ours and consensus’ estimates at 19%.

• The company is acquiring a specialty silicone player, BRB International for €165m. While immediate earnings accretion is only c.2%, the acquisition enables PChem to leverage on BRB’s technology to pursue further growth in specialty chemicals.

• In view of current downcycle of petrochemical market, we trim our FY19-21F earnings by 15-17%.

• Maintain HOLD with new DCF-derived TP of RM9.10 (from RM10.00). Look to accumulate at lower level.

Lower ASP and product spread hit bottomline

1Q19 core PATAMI dropped 29% yoy and 32% qoq to RM868m mainly due to weaker revenue (-17% yoy) resulting from lower ASP (-12% yoy) and product spread amidst uncertainties in trade tension. Sales volume were also weaker, down 5% yoy. Overall, core earnings trailed ours and consensus’ estimates at 19%.

Plant utilisation (PU) remains healthy

The 1Q19 PU was healthy at 95% supported by full utilisation at the O&D segment. On the other hand, F&M segment recorded PU of 92% as there was a 32-day shutdown maintenance at PC Methanol. The management maintains its PU guidance of at least 90% for FY19.

Venturing into silicone production through BRB International

The company is acquiring Da Vinci Group BV (i.e. the holding company of BRB International BV) for €163m. BRB mainly focuses on silicone production (78%) and lube additives (22%) with sales presence in 11 countries and an R&D research lab in the Netherlands. Post acquisition, BRB will add PChem’s specialty chemicals portfolio by 2% to 7%. Management aims to increase this segment to 20-25% and double its earnings in 20 years’ time. Currently, BRB’s annual EBITDA is c.€30m. While immediate earnings accretion is only 2%, we view this acquisition positively as it enables PChem to leverage on BRB’s technology to pursue further growth in specialty chemicals.

Cut earnings on low ASP

In view of escalating trade tension and current downcycle in chemical market, we cut FY19-21F earnings by 15-17%. Note that we have not include BRB’s earnings potential into our forecast.

Maintain HOLD with lower DCF-derived TP RM9.10

We maintain our HOLD recommendation with a lower DCF-derived TP of RM9.10 (from RM10.00) (Table 3). We think the weak chemical market could weigh on the stock in the near-term; longer term outlook remains intact. Look to accumulate the stock at lower level.

Source: BIMB Securities Research - 27 May 2019