PCHEM’s FY18 core net profit of RM5.17bn came above expectations on higher than expected JV & associates contribution. Core net profit increased by 24% thanks to better F&M contribution, stronger JVs & associates as well as lower tax. No changes to our estimates. Maintain HOLD rating with unchanged TP of RM9.76 as FY19 earnings may not be exciting given our concerns on a weaker oil prices outlook leading to potential O&D pricing weakness.

Results above expectations. FY18 core net profit of RM5.17bn (+24% YoY) came above expectations at 112%/110% of our/consensus full year estimates. The positive deviation largely stemmed from stronger than expected JVs & associates.

Dividends. Declared second interim dividend of 18 sen/share (ex-date: 8 Mar; payment date: 12 Mar) (vs. 15 sen in 4Q17), bringing its YTD DPS to 32 sen.

QoQ: 4Q18 revenue grew 5% to RM5.06bn on the back of higher plant utilisation of 94% (vs 79% in 3Q18) despite lower average product prices which resulted from lower crude oil prices. However, 4Q18 core earnings merely increased by 2% QoQ to RM1.29bn due to higher tax expenses (+1.5x) upon de-recognition of unutilised business losses and reinvestment allowances.

YoY: 4Q18 EBITDA decreased by 2% YoY on higher opex incurred on maintenance activities despite higher plant utilisation (vs 93% in 4Q17) and higher crude oil prices. That said, 4Q18 core earnings surged by 28% YoY from RM1.01bn on strong JV & associates contribution (RM42m profit in 4Q18 vs RM43 losses in 4Q17) coupled with lower tax expenses (-35%).

YTD: FY18 EBITDA increased by 5% YoY due to higher F&M segmental EBITDA (+17%; full year contribution for PC Fertiliser Sabah) overwhelming weaker O&D segmental EBITDA (-1%; led by accrual of one-off manpower related expenses). Core earnings further improved by 24% to RM5.17bn thanks to stronger JVs and lower tax expense (-25%),

Outlook. Management is confident that the overall existing plant utilisation could hit at least 90% with several turnaround in FY19. PIC petrochemical plants are at 96% mechanical completion and are eyeing for commercialisation in October 2019. Management targets ramping up utilisation to 70% in the first 3-6 months and to 90% subsequently. Limited information is disclosed on the feedstock pricing despite management acknowledging certain discount to the benchmark pricing are given.

Forecast. We opt to keep our FY19-20 earnings estimates unchanged in view of unexciting petrochemical pricing in FY19.

Maintain HOLD with unchanged TP: RM9.76. Maintain HOLD rating with unchanged TP of RM9.74 based on 10x FY19 EV/EBITDA. This is largely due to our concerns on a weaker oil price outlook in FY19 leading to potential O&D pricing weakness. We reckon that the re-rating catalysts would rest on stronger oil prices outlook and favourable transfer pricing guidance on PIC’s feedstock.

Source: Hong Leong Investment Bank Research - 26 Feb 2019