CCM has received the letter of award from Petronas for the supply of 351,000 MT of caustic soda to its refineries in RAPID. At current prices and pricing formulation, the contract value is approximately RM351.9m over a 3 year period. We are positive on this announcement. We opt for a conservative stance in our earnings forecast. As it is, our projections already make CCM a compelling turnaround story worthy of investing in. The stock is currently trading at an attractive FY19-20 PER of 8.6x-7.9x with an implied dividend yield of 5.8%-6.3%. CCM remains an underappreciated proxy to the glove sector and RAPID integrated petroleum complex. Its turnaround and growth story remains intact. Maintain BUY and TP of RM3.08.

NEWSBREAK

CCM announced that it has accepted the letter of award from Petronas for the supply of caustic soda to Petronas Refinery and Petrochemicals Corporation Sdn Bhd. The contract is based on Petronas’s required demand, estimated to be up to a maximum volume of 351,000 metric tonne. Based on current market prices, pricing mechanism and other terms and conditions, the contract value is estimated to be at RM351.9m for the primary period of 3 years commencing 15 April 2019 until 14 April 2022 with one (1) year extension option.

HLIB’s VIEW

We are positive on this announcement. Although an open secret, CCM’s clinching of the job highlights the resolve of their turnaround story and insatiable hunger to participate in one of the new economic engines of Malaysia that is RAPID Pengerang. In oil & gas refining, caustic soda is used in the extraction of sulphur, sulphur compounds and acids. We understand that the demand from RAPID alone is c.150,000-160,000 MT/annum at full ramp up- anticipated by 2021. This increase is expected to widen the domestic supply gap from 142,000 MT/annum currently to 300,000 MT/annum by 2021 without taking into account organic growth of existing industries. We understand that RAPID’s demand for caustic soda is progressive and in tandem with the commissioning and ramp up of its refineries. As such we estimate that in FY19 the volumes required will be relatively small before a ramp up in orders in FY20. It is understood that the pricing mechanism is referenced to market plus a discount. CCM only has c.80, 000 MT p.a. capacity at this juncture (from PGW2) before a further 40,000 MT p.a. will be reactivated in 2H19 via PGW1. To cater for this contract CCM has secured a back to back agreement with a commodities trading giant from North Asia to commit the contracted supply.

Forecast. While this news is positive, we opt for a conservative stance in our earnings forecast. As it is, our projections already make CCM a compelling turnaround story worthy of investing in.

Maintain BUY, TP: RM3.08. Our TP is a function of FY19 EPS of 23.7 sen pegged to a PE multiple of 13x.The stock is currently trading at an attractive FY19-20 PER of 8.6x-7.9x with an implied dividend yield of 5.8%-6.3%. CCM remains an underappreciated proxy to the glove sector and RAPID integrated petroleum complex. Its turnaround and growth story remains intact.

Source: Hong Leong Investment Bank Research - 23 Apr 2019