PCHEM’s 9M19 core net profit of RM2,475m (-36% YoY) came below expectations on weaker-than-expected O&D segment which saw division EBITDA margins shrinking 12ppts YoY due to soft ASP’s. Thus, we slashed our FY19/20/21 earnings estimates by 14%/15%/14% on weaker ASPs and margins. Maintain HOLD rating with lower TP of RM6.99 (from RM7.71) pegged to 7.5x FY20 EV/EBITDA.

Results below expectations. 3Q19 core net profit of RM553.0m (-51% QoQ, -57% YoY) brings 9M19’s total core net profit to RM2,475m (-36% YoY). At 66%/69% of our/consensus full year estimates, this is deemed below expectations with the anticipation of a weaker 4Q finish for FY19. The negative deviation largely stemmed from weaker-than-expected contribution from olefins and derivatives (O&D) segment.

Dividends. No dividends as expected during this quarter.

QoQ: Core earnings declined 51% from RM1.12bn in 2Q19 as the groups utilisation rate dropped to 81% from 100% QoQ due to statutory turnaround and higher level of maintenance activities undertaken. Subsequently, sales volumes declined in tandem with the lower utilisation rates despite product prices improving slightly QoQ.

YoY: Core earnings declined by 57% YoY from RM1.29bn on weakness in both operating segments. For its O&D division, weaker ASPs and lower sales volume as a consequence of higher plant turnaround activities resulted in a marked decrease in utilisation rates (78% vs. 96% in 3Q18). This resulted in EBITDA declining by 57% whilst corresponding margins plummeted by 13ppts (from 31% YoY). This was further compounded by their F&D segment, despite recording higher utilisation rates at 83% vs. 69%, saw EBITDA decline by 21% YoY on softer ASP’s (EBITDA margins declined by 2ppts).

YTD: Despite higher plant utilisation of 93% (vs 91% in 9M18), 9M19 core earnings fell 36% YoY due to weaker contribution from both O&D (EBITDA: -56% YoY) and F&D (EBITDA: -32% YoY) segments as a result of weaker ASPs as well as weaker JV & associates contribution.

Outlook. We expect that the overall existing plant utilisation should hit at least 90% for FY19 even with several scheduled turnarounds in the current quarter under review. Despite this, ASP’s will remain soft as demand remains weak as a consequence of the prolonged trade war between China and US. More details post analyst call later today.

Forecast. We reduce our FY19/20/21 earnings estimates by 14%/15%/14% respectively on lower contribution from O&D segment in view of weaker ASPs and lower margins.

Maintain HOLD with lower TP: RM6.99. Post earnings adjustment, we maintain HOLD rating with lower TP of RM6.99 (from RM7.71) based on a multiple of 7.5x 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 Nov 2019