We Recently Caught Up With Management to Gauge CCM’s Prospects in 2020. PGW1 Has Commenced Production in Early December. The Recent Cogen Plant Award Will Save C.10% of Electricity Consumption Upon Completion. Beyond 2020, Management Are Keen to Explore Downstream Chlorine Derivatives and to Better Capitalize Its Position Near the RAPID Pengerang Complex. Maintain BUY With a Lower TP of RM1.82 (FY20 EPS of 15.2 Sen Pegged to a PE Multiple of 12x) as We Calibrate Our Caustic Price Assumptions for FY20-21 and Our PE to Better Reflect the Soft Caustic Soda Price Landscape Arising From the Change in Supply Demand Dynamics Due to the Unresolved Trade War Tensions.

We recently caught up with management to gauge CCM’s prospects moving into FY20.

Recap. As at 9M19, revenue declined -2.9% YoY to RM286.8m due to lower revenue contributions from the chemicals division on softer ASPs. The margin squeeze from the chemicals division (-8.2ppts YoY) resulted in core PATAMI declining 39.6% partially offset by lower finance cost (-56.8% YoY) due to its deleveraging activities.

PGW1. We understand that PGW1 has officially commenced production in early December. It was earmarked to commence production much earlier in 2H19 but was hindered due to TNB power supply issues, which only came online on the 20th

November. We understand that PGW1 is operating at a run rate of c.70% up to 1Q20 before a ramp up to c.97% run rate by 2Q20. PGW1 will replace imports by c.30% or 40,0000 MT/annum. With regards to sales to Petronas, management expects volumes would most likely kick in by April-May pending no further complications at RAPID.

Cogen. CCM was recently awarded a RM27.9m job to Sime Darby for a Cogen plant. Management guided that the plant is a 7.8MW plant that will power both PGW1 and PGW2. Upon completion the Cogen plant, this is estimated to save c.10% of electricity consumption per annum. In dollar terms, we can expect savings of c.RM5.5m per annum in electricity costs in FY21, implying a payback period of 5.6 years and an EPS enhancement of c.1.5sen to our FY21 earnings. Although guided for completion in 14 months, we believe that the Cogen plant could be ready much earlier as the technology is “plug & play”. CCM is also considering installing solar panels on its factories to reduce electricity usage and take advantage of the NEM mechanism.

Polymers. The polymers segment will see an uptick in activities in 4Q19 on seasonality. This is on the back of the gloves players building their inventories in anticipation of the earlier CNY in 1Q20.

Forecast. In view of the weaker than anticipated caustic soda prices, we lower our assumption from USD450-500/DMT for FY20-21 to USD400/DMT. As such we lower our earnings by 6%. The sharp decline in ASP will be partially buffered by the volume increase (+50%).

Maintain BUY, TP: RM1.82. Maintain BUY with a lower TP of RM1.82 (from RM2.10). Our TP is a function of FY20 EPS of 15.2 sen pegged to a PE multiple of 12x (from 13x).We take this opportunity to recalibrate our PE to better reflect the soft caustic soda price landscape arising from the change in supply demand dynamics due to the unresolved trade war tensions. Beyond 2020, management are on the prowl to team up with the right partner to explore downstream chlorine derivatives and to better capitalize its position near the RAPID Pengerang complex. We do not discount potential JV’s with established players in the petrochemical field to realize this vision

Source: Hong Leong Investment Bank Research - 4 Feb 2020