CCM announced has awarded an EPCC contract for a Cogen plant to power its chlor alkali facilities. We estimate pro forma net gearing to increase to 0.36x from 0.27x. Earnings enhancement will be c.5.3% to our FY21 earnings. Though unrelated to the news, we take the opportunity to recalibrate our FY20-21 caustic price assumptions. As a result our FY20-21 earnings decline by 19%/39%. Post adjustment our TP declines to RM2.10 (from RM2.58). Still, CCM remains an underappreciated proxy to RAPID and the glove sector

NEWSBREAK

CCM announced that it has awarded an EPCC contract to Sime Darby Energy Solutions Sdn Bhd, for one unit of Co-generation plant (Cogen) at a contract price of RM27.9m at the former’s Pasir Gudang chlor alkali plant in Johor. It is understood that the project shall be completed in 14 months, subject to a no objection letter from TNB. The payment terms shall be on a milestone basis.

HLIB’s VIEW

Our view. We are positive on this announcement. With the reactivation of PGW1, CCM will have increased its chlor alkali capacity by 50%. Note that electricity consumption accounts for c.50% of the cost of production of chlor alkali. We estimate that CCM utilises c. 2.5MWh-3.0MWh per ECU. With the additional capacity from PGW1, this brings CCM’s total ECU to 60,000 as at November 2019 (from 40,000) thus implying usage of 150KWh-180KWh per annum. The rationale behind this award is so as to diversify CCM’s exposure to the increase in electricity rates from TNB.

What is Cogen? Cogen is the simultaneous production of electricity and usable thermal energy from a single fuel source, which is significantly more efficient and cost effective. The heat that is created from Cogen is captured and recycled to provide hot water or steam for other uses such as heating or cooling of production facility.

Impact to gearing. We understand that the Cogen plant will be funded through external borrowings. As at 9M19, CCM had a net gearing of 0.27x, our pro-forma gearing increases to 0.36x as we factor in the incremental increase in borrowings.

Earnings enhancement and payback period. The Cogen plant is expected to save c.RM5.5m per annum in electricity costs in FY21, implying a payback period of 5.6 years. Management guides that EPS enhancement will be 1.5sen or c.5.3% of our FY21 earnings.

Forecast. We estimate pro forma net gearing to increase to 0.36x from 0.27x from undertaking this Cogen plant. Though unrelated to the news, we also take this opportunity to adjust our assumptions for caustic soda prices in FY20-21 (from USD450-500/DMT to USD400/DMT) in view of the softer prices on the back of prolonged US-China trade war resulting in weaker ASP. Our FY20/21 earnings decrease by 19%/39%.

Maintain BUY, with a lower TP: RM2.10. Maintain BUY with a lower TP of RM2.10 (from RM2.58) as we recalibrate our earnings assumptions. Our TP is a function of FY20 EPS of 16.1 sen pegged to a PE multiple of 13x. The stock is currently trading at an attractive FY20-21 PER of 8.6x-8.2x with an implied dividend yield of 5.8%- 6.0%. CCM remains an underappreciated proxy to the glove sector and RAPID integrated petroleum complex.

Source: Hong Leong Investment Bank Research - 2 Dec 2019