9M19 core PATAMI of RM14.6m accounts for 70% of our full year estimates. We deem the results to be broadly within expectations. CCM has completed its de gearing exercise which has resulted in a decline in finance costs by 56.8% YTD. Caustic soda prices are expected to remain stable in 4Q19 subject to no further escalation in the trade war tantrums. Coming off a low base in FY19, FY20 should see earnings growth coming back on track due to (1) PGW1 reactivation – replacing c.28% of domestic imports and (2) commencement of contributions from RAPID (although most likely by 2H20 due to the fire incident at RAPID). Maintain BUY with a TP of RM2.58.

Broadly inline. CCM reported 3Q19 results with revenue of RM96.9m (+4.4% QoQ,+2.0% YoY) and core earnings of RM5.4m (+84.8% QoQ, +53.2% YoY); this brought 9M19 core PATAMI to RM14.6m (-39.6% YoY) which accounts for 70% of our full year estimates. We deem this to be broadly within expectations.

Dividend. Declared an interim dividend of 3 sen/share. Ex. date: 5th December, payment date: 27th December.

QoQ. Revenue improved to RM96.9m (+4.4% QoQ) despite the lower average prices from the chemicals division, offset by higher volumes sold during the quarter from both the chemicals and polymers divisions, coupled with a shift in product/customer mix. PBT increased to RM5.3m (+28.1% QoQ) due to a decline in finance cost by 35.3% QoQ on the successful completion of their debt rationalization plan. Consequently, core PATAMI improved to RM5.4m (2Q19:RM2.9m) after adjusting for EI of -RM1.7m (FX gains 0.2m and provisions of RM1.9m).

YoY. Revenue improved +2.0% YoY (from RM95.1m) on the higher volumes sold (+25%). Despite caustic soda prices declining -22% YoY from an average of USD437/DMT in 3Q18 to an average of USD341/DMT in 1Q19. The resulting margin squeeze saw PBT declining to RM5.3m (-51.1% YoY). In line with the groups de gearing efforts, finance costs declines by 63.2% YoY to RM1.8m (from RM4.9m). Core PATAMI improved to RM5.4m in 3Q19 from RM3.5m in 3Q18 (largely due to a one off write back of RM1.6m from its fertilizer business in 3Q18).

YTD. Revenue declined by -2.9% YoY to RM286.8m (from RM295.5m) due to lower revenue contributions from the chemicals division. The margin squeeze from the chemicals division (-8.2ppts YoY) resulted in core PATAMI declining 39.6% to RM14.6m partially offset by the groups lower finance cost (-56.8% YoY) due to its deleveraging activities.

Outlook. We understand that PGW1 has commenced operations as at November. Initially we had expected the commencement to be earlier in the 2H19, but there were delays due to (1) Pasir Gudang river poisoning dilemma and (2) an accident at the industrial park. Both incidences resulted in a stop work order from the DOE and TNB. Coming off a low base in FY19, FY20 should see earnings growth coming back on track due to (1) PGW1 reactivation – replacing c.28% of domestic imports and (2) commencement of contributions from RAPID (although most likely by 2H20 due to the fire incident).

Forecast. Unchanged.

Maintain BUY, TP: RM2.58. Maintain BUY and our TP of RM2.58. 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 FY20.

Source: Hong Leong Investment Bank Research - 21 Nov 2019