PCHEM’s 1H19 core net profit of RM1,922m (-27% YoY) came below expectations on weaker than expected olefins and derivatives segment. Management is confident that the overall existing plant utilisation could hit at least 90% (1H19’s 99%) even with several turnarounds in 3Q19. However, what caught us by surprise is the lower than expected PIC utilisation guidance of 60% (from 70% previously) in FY20 and to take three years to ramp up its utilisation to 90%. Thus, we slashed our FY19/20/21 earnings estimates by 12%/17%/11% on weaker ASPs, margins and utilisation. Maintain HOLD rating with lower TP of RM7.71 (from RM8.86) pegged to 7.5x FY20 EV/EBITDA.

Results below expectations. 2Q19 core net profit of RM1,120m (+40% QoQ, -18% YoY) brings 1H19’s total core net profit to RM1,922m (-27% YoY). At 45%/48% of our/consensus full year estimates, it is deemed below expectations with the anticipation of a weaker 2H19. The negative deviation largely stemmed from weaker than expected contribution from olefins and derivatives (O&D) segment.

Dividends. Interim dividend of 11sen/share (vs 14 sen/share in 2Q18) was declared.

QoQ: Core earnings improved by 40% to RM1.12bn in 2Q19 thanks to stronger contribution from fertilisers and methanol (F&M) segment led by higher plant utilisation of 100% (vs 92% in 1Q19). This was offset by weaker contribution from O&D segment as a result of weaker plant utilisation of 97% (vs 100% in 1Q19) and lower ASPs.

YoY: Core earnings declined by 16% YoY from RM1.37bn on weaker O&D division led by weaker ASPs despite higher sales volume as a consequence of higher plant utilisation (vs 88% in 2Q18). This was marginally cushioned by better F&M segment on lower opex and higher sales volume.

YTD: Despite higher plant utilisation of 99% (vs 98% in 1H18), 1H19 core earnings fell 27% YoY no thanks to weaker contribution from both O&D and F&D segments as a result of weaker ASPs as well as weaker JV & associates contribution.

Outlook. Management is confident that the overall existing plant utilisation could hit at least 90% even with several turnarounds in 3Q19. Some of the affected feedstocks and end products have been stored up in advance to mitigate the impact from the upcoming scheduled shutdown. While PCHEM may benefited from some volume uptick from China as a consequence of escalation of trade war between China and US, overall impact is likely to be negative as petrochemical prices are likely to stay unexciting in the near term.

Three year to fully ramp-up PIC. PIC petrochemical plants are at 98.8% completion and are at commissioning stage. The fire incident that happened early of the year is unlikely to affect the commercialisation as Petronas is likely to bypass the ARDS by obtaining sweeter feedstocks. However, management expects minimal contribution from PIC this year and has guided to take three years to fully ramp up the petrochemical plants to 90% utilisation, of which, first year utilisation will be only at 60%. This is lower than their previous guidance of 70%.

Forecast. We slashed our FY19/20/21 earnings estimates by 12%/17%/11% respectively on lower contribution from O&D segment in view of weaker ASPs and lower margins as well as lower utilisation from PIC.

Maintain HOLD with lower TP: RM7.71. Post earnings adjustment, we maintain HOLD rating with lower TP of RM7.71 (from RM8.86) based on lower multiple of 7.5x (from 9.5x) FY20 EV/EBITDA. This is largely due to the sector de-rating (as evident by the global peers) as a result of sluggish petrochemical outlook.

Source: Hong Leong Investment Bank Research - 14 Aug 2019