• Overview. 3Q19 core profits dropped to RM616m (-51% yoy, -45% qoq) mainly on lower product spread and exacerbated by plant maintenance at the 600k MTPA ethylene cracker, LDPE plant and SAMUR. The O&D segment EBITDA margin slumped to 18.2% (3Q18:30.5%, 2Q19: 27.6%) on higher imported ethylene cost amidst shutdown of the cracker.

• Key highlights. 3Q19 plant utilisation (PU) was marginally higher at 81% (3Q18: 79%) with lower plant turnaround activities. Meanwhile, the 9M19 PU stood at 93% which was above management target of 90% for FY19.

• Against estimates: Above. 9M19 core profit of RM2.6bn (-33% yoy) came in above our forecast at 82% on lower-than-expected minority interest charge off. It was broadly inline with consensus’ at 72%.

• Outlook. The ASP for chemical products including PE, PP, MEG and methanol are expected to remain weak. Notwithstanding, we expect higher PU post-plant shutdown and new income from acquisition of Da Vinci (completed in Sep 2019) to mitigate the impact. Note that we have not factor in Da Vinci contribution into our forecast.

• Our call. Maintain HOLD with DCF-derived TP of RM7.60 (from RM7.50) as we roll-over to FY20. This implies 16x FY20 P/E and 14x ex-cash P/E. We believe the challenging near term outlook has been priced in. In our view, the medium to long term prospects remain intact as it pursues growth within the specialty chemical space. Look to accumulate at lower levels.

Source: BIMB Securities Research - 14 Nov 2019