• Overview. PChem 1Q20 core profits plunged 55% yoy to RM393m as product prices remain depressed in tandem with low oil price. It is further compounded by the inventory losses impact worth RM90m stemming from sharp drop in ethylene-based products (ethylene, Polyethylene and ethylene glycol). Our core profits exclude unrealised FX gain worth RM176m arising from translation effect of shareholders loan extended to its subsidiary. On qoq basis, core profits grew 41% mainly due to lower maintenance opex.
• Key highlights. 1Q20 plant utilisation (PU) was stable at 94% (1Q19: 95%). Sales volume was largely flat at 1.9m MT despite weaker demand from China due to Wuhan lockdown. The available cargoes were then diverted to Indonesia. As China reopens its economy, the export to China has recovered swiftly
• Against estimates: Below. Its 3MFY19 core profit of RM393m came in behind both our and consensus’ forecast at 17%. The main deviation against our forecast was due to the impact of inventory losses from sharp drop in product prices.
• Outlook. Despite weak demand amidst lockdown measures across the globe, sales volume and plant utilisation remain robust. While the ASP for chemical products are expected to remain weak, it seems to have bottomed out in April, based on our estimate. We retain our earnings forecast at this juncture as we expect the impact of inventory losses to normalise in coming quarters.

• Our call. We maintain our BUY call on PChem with an unchanged DCF-derived TP of RM6.60. This implies 22x FY20 PE and 18x ex-cash PE. We think the company will emerge stronger out of the pandemic crisis leveraging on its huge war chest of RM10.3bn (or RM1.28/share) to pursue growth within specialty chemical space.

Source: BIMB Securities Research - 21 May 2020