4Q19 core net profit of RM340.0m (-39% QoQ, -74% YoY) brings FY19’s total core net profit to RM2,815m (-46% YoY), which came in below expectations. This is largely due to weaker-than-expected contribution from both (O&D) and (F&M) segment. Thus, we slash our FY20-21 earnings estimates by 15%-10% on weaker ASPs and margins. Maintain HOLD rating with lower TP of RM6.12 (from RM6.99) pegged to 7.5x FY20 EV/EBITDA.

Results below expectations. 4Q19 core net profit of RM340.0m (-39% QoQ, -74% YoY) brings FY19’s total core net profit to RM2,815m (-46% YoY). At 87%/84% of our/consensus full year estimates, this is deemed below expectations. The negative deviation largely stemmed from weaker-than-expected contribution from both (O&D) and (F&M) segment and higher OPEX.

Dividends. Declared second interim dividend of 7 sen/share (ex-date: 12 March; payment date: 27 March), bringing YTD dividend to 18 sen/share. Representing a pay-out of 51%, yielding 3.1%.

QoQ. Core earnings declined 39% despite the group’s utilisation rate improving to 89% from 81% QoQ due to lower statutory turnaround and maintenance activities undertaken. Whilst sales volumes improved in tandem with the higher utilisation rates, weak ASP remains the key determining factor in the decline in profitability.

YoY. Core earnings declined by 74% YoY on weakness in both operating segments (group plant utilisation: 89% vs. 94%). Weakness in the O&D division is due to (i) weaker ASPs (ii) lower sales volume due to higher plant turnaround activities (iii) a decline in utilisation rates (98% vs. 100% in 4Q18) and (iv) a stronger MYR (vs. USD) during the quarter. This resulted in EBITDA declining by 71% whilst corresponding margins plummeted by 21ppts YoY (to 11%). The F&D segment, recorded a lower utilisation rate of 83% (vs. 89% SPLY), EBITDA decline by 30% YoY in tandem with topline.

YTD. Despite recording a plant utilisation rate of 92% (vs 92% in FY18), FY19 core earnings fell 46% YoY due to weaker contribution from both O&D (EBITDA: -48% YoY) and F&D (EBITDA: -17% 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 >95% for FY20 (FY19: 92%) on lower plant turnaround activity. Despite this, ASP’s will remain soft as demand remains weak due to (1) ample supply, (2) prolonged trade war between China and US, (3) the Covid-19 outbreak. More details post analyst call later today.

Forecast. We reduce our FY20-21 earnings estimates by 15% and 10% respectively on lower contribution from O& D and F&M segments in view of weaker ASPs and lower margins.

Maintain HOLD with lower TP: RM6.12. Post earnings adjustment, we maintain HOLD rating with lower TP of RM6.12 (from RM6.99) 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 - 27 Feb 2020