We met up with management and left feeling positive. Capacity expansion remains on schedule whilst caustic prices continue to show an upward trend since our initiation. Maintain BUY, our TP of RM3.08 provides an upside of 66.5%. We like the stock as the turnaround story is compelling, market structure is favourable and headwinds from RAPID and capacity expansion driven earnings will continue to power CCM forward. The stock is in deep value, currently trading at an attractive FY18-20 P/E of 10.4x, 7.8x, 7.2x with an implied dividend yield of 4.8%, 6.4%, 7.0%.

We recently met up with management with members of the buy side and the following are some key take-aways.

Caustic soda. Prices continue to recover since the July low of USD391/MT with the current prices hovering c. USD480-466/MT (+23%-19%). Management expects supply will tighten as we enter October and the wintering season begins in China on the back of the production “moderation” in line with China’s environmental agenda.

Bad weather. Severe weather in the gulf of Mexico and Japan has a positive correlation with the prices of caustic soda in South East Asia by virtue of (i) production disruption in the gulf will see volumes in Asia shifted to the US and (ii) likewise, a typhoon in North Asia will disrupt production and cause the reference price for the South-East Asian market for caustic to rise.

On track. Capacity expansion remains on schedule with the Bangi Polymers plant will see an additional capacity of 10%-15% to be delivered in 4Q18. We understand that PGW1 reactivation is c.30% completed at this juncture and scheduled demolitions will be undertaken next. They will receive the equipment in 1Q19 and commission in 2Q19 as scheduled.

RAPID. CCM was recently invited to bid for the supply of a small volume of caustic soda for a preliminary test run at RAPID (c.5,000MT). Management expects the formal “invitation to bid” (ITB) to be delivered soon as it was earlier touted in August/September. This is in view of RAPID commencing operation by 1H19. CCM is positive on her chances of winning the contract to supply a portion of the volumes by virtue of the proximity of her plants (Pasir Gudang) to RAPID. In contrast, her competitor’s plants are located in Ipoh and Kemaman.

Shariah review. We expect CCM to remain on the Shariah list come the November review as the bulk of her cash holdings are placed in Shariah instruments and all of its term loans are with IFI’s with the conventional portion of debt over total debt estimated at c.3%.

2H18 outlook. We expect the velocity of revenues and earnings to mirror the trajectory of caustic soda prices (beginning in May 2018) for 3Q on the back of the lower caustic and chlorine ASP. To note 3Q17 caustic prices averaged USD518/MT vs. 3Q18 437 USD/MT. Thus we are inclined to remain on the side of caution; 1H18 core PATAMI already makes up more than 60% of our full year forecast (1H18:RM21.2m to FY18e:RM29.7m).

Maintain BUY, TP: RM3.08. Our TP is a function of FY19 EPS of 23.7 sen pegged to a P/E multiple of 13x which is in line with the Malaysian chemicals sector FY19 average. 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. The stock is in deep value, currently trading at an attractive FY18-20 PER of 10.4x, 7.8x, 7.2x with an implied dividend yield of 4.8%, 6.4%, 7.0%.

Source: Hong Leong Investment Bank Research - 15 Oct 2018