Highlights

• CCM Bhd is undergoing a restructuring which will see it demerge and deleverage. The deleveraging activity should (i) unearth the earnings of its chemicals and polymers division, (ii) reduce interest expense and admin costs by c.RM15-20m per annum and (iii) potentially boost dividend yield to 8.6-12.1%.p.a. The demerger will allow investors to better manage their exposure to chemicals/polymer business and the pharmaceutical business.
• CCMB is an easier entry point for investors who wish to have exposure to the much sought CCMD, but have not been able to due to liquidity constraints. The distribution of shares (for every 1 CCM shares investors will receive 1.219 CCMD shares) to investors will inherently boost liquidity for CCMD shares.
• CCMB is an underappreciated proxy to the glove sectors capacity expansion drive. Both its chemicals and polymers segments have direct exposure to the glove manufacturing process. Top glove and Hartalega are amongst its clientele.
• Our estimated FY18 PAT of RM44.6m from the pure chemical and polymers business on a standalone basis implies a forward P/E of only 5.7x which is a discount of c.40% relative to its closest listed peers.
• We opine that due to the duopolistic structure of the Chlor Alkali market and direct exposure to the gloves sector which is on an upcycle, the stock warrants a re-rating.
• We expect forward earnings growth from the polymers segment in FY18 to be driven by de-bottlenecking, which should see an increased capacity of 20% whilst the chemicals segment should see 50% growth in FY19 on the back of capacity expansion of its Chlor Alkali plant. Both segments will grow in tandem as the glove sector ramps up capacity.

Forecasts

• Not available.

Catalysts

• Catalysts for the stock arise from its deleveraging exercise. The demerger will allow the group to focus on its chemicals and polymers which are expected to grow in tandem with the capacity expansion of the gloves players. Distribution of CCMD shares to investors will inherently boost its liquidity. Tailwind from PROC’s smog war bodes well for Chlor Alkali prices.

Risks

• Weaker than expected demand from its polymers and chemicals business. Failure to meet deadlines of its corporate proposals and subsequent prolonging of the deleverage exercise.

Rating

Not Rated

Valuation

• Our SOP derived Fair Value of RM 2.10 provides a potential upside of 37.3%. The upside risk to our SOP is growth in CCMD’s prospects post demerger. We believe the corporate deal will help unlock the value of CCMB.
• At the current price of RM1.53 CCMB is trading at a steep discount of c.40% relative to its domestics peers which are unjustified as moving forward core earnings are visibly strong and expected dividend yield is above average.

Source: Hong Leong Investment Bank Research - 15 Nov 2017