We are initiating coverage on CCM as we believe that there are a multitude of factors that warrant investors’ attention namely being (i) capacity expansion (+15% Polymers division, +50% chemicals divisions); (ii) de-leveraging exercise (reducing interest expense by c.52%); (iii) direct exposure to the glove sector’s capacity expansion (iv) RAPID kicker and (v) undemanding valuations (FY18-20 PER of 11.0x, 8.3x, 7.6x). We like CCM as a successful turnaround play and initiate coverage with a BUY rating and TP of RM3.08.

In a follow up to our earlier report titled “Killing two birds with one stone”, we are initiating coverage on CCM as we feel that it has a multitude of catalysts in its narrative which warrant further attention by investors. Chiefly being its de-gearing exercise which will reduce its interest expense by c.RM13-14m p.a. (-52%) and capacity expansion program which is expected to drive earnings growth in the near term (FY18-21f PATAMI CAGR: +17.4%).

Duopoly. For the uninitiated, CCM is a major producer of inoraganic chemicals and polymers in Malaysia, with an estimated market share of 26% of caustic and 36% for chlorine and ranks top 3 in terms of suppliers of raw materials (polymers) to our glove sector. Having undergone its restructuring and deleveraging program, earnings visibility has improved whilst earnings outlook is brighter than ever.

Proxy to glove sector. CCM is an underappreciated proxy to the glove sector’s capacity expansion drive (10 year CAGR 7.4%). Both its chemicals and polymers segment have direct exposure to the glove manufacturing process. We feel that CCM is an underappreciated proxy to the robust glove sector which is already trading at above 35x PE or 2 SD above 3 year historical mean.

Earnings growth. Forward earnings growth from the polymers segment will be driven by de-bottlenecking, which should see an increased capacity of 10%-15% in 4Q18, whilst the chemicals segment should see 25% growth in FY19 on the back of capacity expansion from the reactivation of its chlor-alkali plant PGW1.

Forecast. We forecast FY18 core earnings to hit RM29.8m, a commendable return to the black (FY17: -RM2.7m). For FY19, we are forecasting bumper earnings of RM39.7m (+33% YoY) on the back of full impact of the de-leveraging and partial impact of PGW1 reactivation. Earnings growth will moderate in FY19 (+9% YoY) to RM43.2m driven namely the full year impact from PGW1.

Dividend yield. Based on our forward earnings estimates and a conservative 50% pay-out assumption, an entry price of RM1.96 would imply a dividend yield for FY18- 20 of 4.4%-6.4%. CCM has a dividend pay-out policy of 50%-70% of PAT.

Risk. Downside risk to our forecasted numbers pertain to (i) average prices of caustic soda falling below USD500 MT/annum moving forward and (ii) capacity expansion from PGW1 falling behind schedule. Upside risk to the stock includes (i) successful bidding for supply of caustic soda to RAPID and (ii) higher caustic soda prices.

Initiate with a BUY, TP: RM3.08. Our TP is a function of FY19 EPS of 23.7 sen pegged to a PE multiple of 13x. Our TP provides a potential upside of 57%. A P/E of 13.0x is in line with the Malaysian chemicals sector FY19 average of 12.8x (see figure #17). We feel that this is justified given that the turnaround story is compelling, market structure is favourable and headwinds from RAPID and capacity expansion driven earnings are moist in the air. With virtually no broker coverage on the stock, we opine that CCM is under-researched and under-owned amongst institutional investors. The stock is currently trading at an attractive FY18-20 PER of 11.0x, 8.3x, 7.6x.

Source: Hong Leong Investment Bank Research - 21 Sept 2018