1H19 core PATAMI of RM8.8m accounts for 22% of our full year estimates. We deem the results to be below expectations. The deviations mainly stems from the persistently soft ASP for caustic soda (-31% YoY) vs. our forecast assumptions. We adjust our FY19-FY20 earnings downward by 47% and 21% as we factor in a lower caustic soda price assumption of USD400/DMT for FY19 and USD450/DMT for FY20 vs. USD500/DMT previously. Maintain BUY with a lower TP of RM2.58 (from RM3.08).

Below expectations. CCM reported 2Q19 results with revenue of RM189.8m (-4.3% QoQ,-6.2% YoY) and core earnings of RM2.9m (-46.8% QoQ, -68.8% YoY); this brought 1H19 core PATAMI to RM8.8m (-57.3%) which accounts for 22% of our full year estimates. We deem the results to be below expectations. The deviations mainly stems from the persistently soft ASP for caustic soda (-31% YoY) vs. our forecast assumptions. The soft caustic soda ASP is a function of (i) jitters from the trade war and (ii) integrated NEA vinyl manufacturers taking advantage of higher vinyl vs. ethylene prices, thus resulting in excess caustic in the market as chlor-alkali production is ramped up to take advantage of this situation.

Dividend. No dividends declared in this quarter under review.

QoQ. Revenue declined to RM92.8m (-4.3% QoQ) attributed namely to lower average prices from the chemicals division, lower volumes sold due to the heavy vehicle road ban during the festive periods and lower trading volumes. PBT declined to RM4.2m (- 56.3% QoQ) on the loss operational leverage in tandem with velocity of caustic soda price softness. Consequently, core PATAMI declined to RM2.9m (1Q19: RM5.5m) after adjusting for EI of RM0.4m (FX gains).

YoY. Revenue declined -6.2% YoY (from RM99.0m) on softer ASP from its chlor alkali products despite the higher volumes sold (+21%). Caustic soda prices declined -31% YoY from an average of USD564/MT in 2Q18 to an average of USD396/DMT in 1Q19 due to the above mentioned factors. The resulting margin squeeze saw PBT declining to RM4.2m (-74.5% YoY). In line with the groups de-gearing efforts, finance costs declines by 54% YoY to RM2.8m (from RM6.1m). In tandem with the softer chlor-alkali prices core PATAMI decreases from RM9.4m in 2Q18 to RM2.9m in 2Q19.

YTD. Revenue declined -5.3% YoY to RM189.8m (from RM200.4m) due to lower contributions from the chemicals division. The margin squeeze from the chemicals division (-7.9ppts YoY) resulted in core PATAMI declining 57.3% to RM8.8m partially offset by the groups lower finance cost (-54.1% YoY) due to its deleveraging activities.

Outlook. We continue expect a stronger 2H19 on the back of (i) PGW1 reactivation – replacing c.28% of domestic imports and (ii) commencement of contributions from RAPID.

Forecast. We adjust our FY19-FY20 earnings downward by 47% and 21% as we factor in a lower caustic soda price assumption of USD400/DMT for FY19 and USD450/DMT for FY20 vs. USD500/DMT previously. We also take this opportunity to roll our valuations into FY20.

Maintain BUY, TP: RM2.58. Maintain BUY and a lower TP of RM2.58 (from RM3.08). Our TP is a function of FY20 EPS of 19.9 sen pegged to a PE multiple of 13x. 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 late FY19 and beyond.

Source: Hong Leong Investment Bank Research - 29 Aug 2019