• Overview. 3Q19 net profit plunged 63% yoy mainly on weaker margin in polymer segment (PE, PP) amidst excess supply from US. On qoq basis, excluding RM46m gain from insurance claim in 2Q19, core net profit more than doubled to RM89m on low base effect and recovery in the O&D segment (i.e. benzene and butadiene).

• Key highlights. 3Q19 plant utilisation was higher at 91% (2Q18: 87%, 1Q19: 89%). 9M19 production volume rose 11% to 2,372k MT (1H18: 2,132k MT) while sales volume rose in tandem to 1,573k MT (1H18: 1,423k MT) from the new PP3 plant.

• Against estimates: below. 9M19 net profit declined by 76% to RM166m. This were both below ours and consensus forecast at 30% and 47% respectively. The main deviation against our forecast was due to higher-than-expected depreciation and effective tax rate.

• Earnings revision. We cut our FY19-21F earnings by 36-63% (Table 3) as we reflect the higher depreciation and effective tax rate. We also lower our FY20F utilisation rate assumption to 82.5% (from 87.5%) on scheduled plant turnaround involving all Malaysian plants excluding cracker 1 and PP3 in 2Q20.

• Our call. Downgrade to SELL (from HOLD) with a lower TP of RM2.00 (from RM2.90) following our earnings revision and also rollover our valuation to FY20. Our TP is based on the GGM methodology and implies a fair EV/ROIC multiple of 0.1x (Table 4). We are cautious on the narrowing polymer spread (the segment accounts for c.80% of revenue), particularly in view of the new supply from RAPID.

Source: BIMB Securities Research - 1 Nov 2019