9M18 revenues of RM295.4m (+13% YoY) translated into core PATAMI of RM23.8m (+109%YoY) which accounts for 80% of our full year estimates. We deem the results to be inline as we expect a shorter performance in 4Q on the back of the lower average prices of caustic soda prices QoQ. The stock is currently trading at an attractive FY18-20 PER of 10.4x, 7.8x, 7.1x with an implied dividend yield of 4.8%, 6.4%, 7.0%.

Within expectations. 9M18 revenue of RM295.4m (+13% YoY) translated into core PATAMI of RM23.8m (+110%YoY) which accounts for 80% of our full year estimates. We deem the results to be inline as we expect a shorter performance in 4Q on the back of the lower average prices of caustic soda prices QoQ.

QoQ. Revenue declined 4.0% to RM95.1m QoQ attributed namely to lower market prices for caustic soda. Consequently, PBT margin slid by 5.1ppts (from 16.5%). Normalized effective tax rates were higher QoQ on the back of higher non-deductible expenses. Consequently, core PATAMI decreases to RM3.3m (from RM9.4m).

YoY. Revenue grew +7.9% YoY (from RM88.1m) on higher volumes from the chemicals division (revenue: +5.3% YoY) and better sales mix as well as volumes from the polymers division (revenue:+17.8% YoY). Consequently PBT grew 12x to RM10.9m (from RM0.8m YoY) on the back of successful transformation into a leaner organization (lower staff headcount) and lower finance costs of c.37.5% YoY on the back of their progressive de-gearing exercise. Core PATAMI declined by 54.7% YoY on the back of higher provisions made in 3Q17 (RM2.8m) vs a write back of RM0.3m in 3Q18 due to their restructuring in FY17.

YTD. Group revenue grew 13.0% YoY to RM295.5m on the back of higher caustic soda volumes (+16.0% YoY) from the chemicals division (revenue: +15.1%) and better sales mix from the polymers division (revenue: +15.8%). Consequently, group PBT grew +430% on lower admin and finance costs YoY on the back of the group’s turnaround. Segmentally, chemicals division improved by 2.9ppts YoY to 16.7% (from 13.8%) whilst the polymers division saw blended PBT margin erosion of 2.1ppts (from 23.8%) attributed in part to higher raw material prices in tandem with the higher oil prices YoY. Core PATAMI grew by 108.7% YoY to RM23.8m in tandem overall greater headline performance.

4Q18 outlook. We expect the velocity of revenues and earnings to mirror the trajectory of caustic soda prices on the back of the lower caustic and chlorine ASP to be partially offset by stronger performance from their polymers division on the back of the debottleneck exercise which has seen capacity improved by c.10% YoY.

Caustic prices. The recent slump in Asian caustic prices is due to the BIS (Bureau of Indian Standards) certification issue which is still unresolved. Exporters in North Asia and the Middle East are diverting cargo to unconventional markets or dropping export prices to attract buying interest. Many of the exporters have already submitted their BIS application, and are awaiting approvals.

Forecast. Unchanged as the results were within expectations.

Maintain BUY, TP: RM3.08. Our TP is a function of FY19 EPS of 23.7 sen pegged to a PE multiple of 13x which is in line with the Malaysian chemicals sector FY19 average. The stock is currently trading at an attractive FY18-20 PER of 10.4x, 7.8x, 7.1x with an implied dividend yield of 4.8%, 6.4%, 7.0%.

Source: Hong Leong Investment Bank Research - 14 Nov 2018