• Overview. PChem 2Q20 core profits plunged 60% qoq to RM159m due to further drop in average selling price (ASP) and lower other income. Revenue declined by 18% qoq to RM3.2bn due to lower ASP but partially offset by higher sales volume. Our core profits exclude unrealised FX loss worth RM47m and inventory write-back gain worth RM74m following recovery in product prices.
   
• Key highlights. 2Q20 plant utilisation (PU) rose to 100% (1Q20: 94%) on lower maintenance activities.

• Against estimates: Below. 1HFY20 core profit of RM552m (-72% yoy) came in behind both our and consensus’ forecast at 23% and 30% respectively. The main deviation against our forecast was due to weaker than expected ASP and higher depreciation charges. We cut FY20F/FY21F/FY22F earnings by 16%/6%/4% to reflect weaker ASP and higher depreciation charges (Table 4).

• Dividend. A 5sen DPS was declared, implying 72% payout. This is lower than 11sen DPS for 1H19.

• Outlook. Product prices are expected to remain weak despite initial signs that they could have bottomed out in 2Q20.

• Our call. Downgrade to HOLD (from BUY) as we think there is no meaningful catalyst to boost the share price higher in near term, plus the upside for share upside is currently at 8%. We revise our TP to RM6.70 (from RM6.60) as we roll-over our valuation to FY21. This implies 22x FY21 PE and 17x ex-cash PE. Short-term uncertainties notwithstanding, we continue to favor the stock on a longer term perspective for growth potential in specialty chemical space leveraging on its net cash balance of RM10.7bn (or RM1.34/share). Look to accumulate at lower level.

Source: BIMB Securities Research - 21 Aug 2020