1Q19 core PATAMI of RM5.5m is within our expectations as 1Q is seasonally weaker (shorter working month and clients undertaking statutory shutdowns). We expect a stronger 2H19 on the back of (i) PGW1 reactivation – replacing c.28% of domestic imports, (ii) sequentially stronger expected Caustic soda prices and (ii) commencement of contributions from RAPID. Maintain BUY and TP of RM3.08.

Inline. 1Q19 revenue of RM96.9m translated into core PATAMI of RM5.5m which accounts for 14.0% of our full year estimates. We deem the results to be inline with our expectations as 1Q is seasonally weaker (shorter working month and clients undertaking statutory shutdowns). Furthermore we expect a stronger 2H19 on the back of (i) PGW1 reactivation – replacing c.28% of domestic imports, (ii) sequentially stronger expected Caustic soda prices and (iii) commencement of contributions from RAPID.

Dividend. No dividends declared in this quarter under review.

QoQ. Revenue declined to RM96.9m (-3.5% QoQ) attributed namely to lower average prices (-2.3% QoQ on prices we track) from the chemicals division offset by higher trading volumes (RAPID’s commissioning and testing orders). PBT was flattish at RM9.5m (-1.0% QoQ) on the back of mixed performance from both chemicals (-40.4% QoQ – soft ASP) and polymers segment (+45.3% QoQ – better product mix). PBT margins improved by 0.2ppts as the improvements from the polymers division overwhelmed the impact from softness in caustic soda prices. Consequently, core PATAMI declined to RM5.5m (4Q18:RM7.0m) after adjusting for EI amounting to RM-0.7m (FX, write-backs and gains on disposal of Nilai land).

YoY. Revenue declined -4.4% YoY (from RM101.4m) on softer ASP from its chlor alkali products offset by higher volumes sold across the chemicals segment (c. +12%- +35% across key chemical SKU’s). PBT declined to RM9.5m (-34.4% YoY) as caustic soda prices -41% YoY from USD632/DMT (peak prices on the back of global macro factors resulting in shortage from Europe to China) in 1Q18 to USD375/DMT in 1Q19. In line with the groups de-gearing efforts, finance costs declined by 54% YoY to RM2.6m (from RM5.6m). In tandem with the softer chlor-alkali prices core PATAMI decreased from RM11.2m in 1Q19 to RM5.5m.

Outlook. Note that 1Q19 caustic prices very much reflect the tail end effects of the BIS issue. Barring unforeseen circumstances, we can expect ASP’s to improve as cargoes are redirected away from ASEAN and prices normalize. Average prices for Apr-May have improved (+7%) vs. 1Q19 average of USD375/DMT.

Forecast. Our FY19 forecasts remains unchanged are we expect sequentially stronger quarters moving forward. Our FY20 forecast adjusts downward by 2.4% on the back of model up keeping post release of annual report. We introduce our FY21 forecast.

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 PE of 8.4x-7.9x with an implied dividend yield of 6.0%-6.4% and a 3 year earnings CAGR of 15.1%. CCM remains an underappreciated proxy to the glove sector and RAPID integrated petroleum complex. We can expect the PGW1 reactivation to drive earnings growth in FY19 and beyond.

Source: Hong Leong Investment Bank Research - 29 May 2019