FY19 core PATAMI of RM19.1m accounts for 91% of our full year estimates. We deem the results to be below expectations. Caustic soda prices are expected to remain stable in FY20 (albeit soft) subject to no further escalation in the trade war tantrums or prolonged impact from Covid-19. 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. Maintain BUY with a lower TP of RM1.44 (FY20 EPS of 12.0 sen pegged to a PE multiple of 12x) after lowering our caustic soda price assumption to USD350/DMT (from USD400/DMT) for FY20-21.

Below. CCM reported FY19 results with revenue of RM386.1m (+2.4% QoQ,-2.5% YoY) and core earnings of RM4.3m (-54.4% QoQ, -64.8% YoY). This brought FY19 core PATAMI to RM19.1m (-64.8% YoY) after adjusting for EI’s of RM3.0m (provisions of RM1.9m, write back of RM0.7m and impairments of RM1.8m).This accounts for 91% of our full year estimates which is below expectations.

Dividend. Declared a final dividend of 2sen/share (YTD: 5 sen/share, yielding 4.1%). Ex. date: 4th June, payment date: 19th June.

QoQ. Revenue improved to RM99.3m (+2.4% 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. PBT declined to RM5.1m (-4.8% QoQ) cushioned by a decline in finance cost by 35.3% QoQ (on the reversal of prior quarters charges due to MFRS123, which requires interest expense for qualifying assets to be capitalized). Consequently, core PATAMI declined to RM4.3m (3Q19:RM5.4m) after adjusting for EI of RM1.2m (provisions of RM1.1m, write back of RM1.7 and impairments of RM1.8m).

YoY. Revenue declined -1.2% YoY (from RM100.5m) on lower contribution from the chemicals division. Caustic soda prices declined -17.4% YoY from an average of USD384/DMT in 4Q18 to an average of USD317/DMT in 4Q19. The resulting margin squeeze (operating level: chemicals -6.9ppts, polymers +2.9ppts ~ better product mix) saw PBT declining to RM5.1m (-47.2% YoY). Subsequently, core PATAMI declined 38.9% reflective of the weaker operating leverage YoY.

YTD. Revenue declined by -2.5% YoY to RM386.1m (from RM395.9m) due to lower revenue contributions from the chemicals division (-3.6% YoY). The margin squeeze from chemicals (-7.9ppts YoY) and polymers (-1.5ppts YoY) resulted in core PATAMI declining 38.9% to RM19.1m partially offset by the groups lower finance cost (-63.9% YoY) due to its deleveraging.

Outlook. Coming off a low base in FY19, FY20 should see earnings growth coming back on track due to (1) PGW1 reactivation with +50% volume increase YoY, replacing c.28% of domestic imports and (2) commencement of contributions from RAPID (although most likely by 2H20 due to the fire incident).

Forecast. We adjust our caustic soda price assumptions from USD400/DMT for FY20-21 to USD350/DMT. As such our FY20-21 earnings decline by 21% and 24%.

Maintain BUY, TP: RM1.44. Maintain BUY and lower TP of RM1.44 (from RM1.82). Our TP is a function of FY20 EPS of 12.0 sen pegged to a PE multiple of 12x. 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 - 21 Feb 2020