O&D margin compression were due to higher inventory costs and soft ASP’s. China accounts for c.15% of total sales and management are confident of being able to reroute cargoes assuming all orders are stopped. Although that is not the case as orders for early March are being loaded as scheduled. Management expects group plant utilisation to hit c.95% in FY20 due to lower incidence of TA activities. However we remain wary on ASP, against the backdrop of weaker global economic growth further hampered by Covid-19. Maintain HOLD rating and unchanged TP of RM6.12 based on a multiple of 7.5x FY20 EV/EBITDA.

We Joined PCHEM’s 4Q19 Analyst Con-call; the Following Are Some of the Key Takeaways.

Recap. 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 (FY19: -RM54m vs. RM108m SPLY).

O&D margin compression. The O&D segment experienced a margin compression of 9ppts (from 18%) at the EBITDA level on a QoQ basis. Management explained that this was due to the TA activity undertaken in 3Q (3 plants with c. 15% of O& D volumes) and the resulting higher overheads due to lower overall utilisation, increasing cost of inventory, which were sold in 4Q amidst lower prices QoQ.

China Impact. China accounts for 18% of total production volumes and c.15% of PCHEM’s sales. China is more a swing market, not core market. An MEG cargo that is due to be shipped in early March has not been cancelled and is scheduled for delivery to China. Management highlighted that they have undertaken their own stress tests, and are fully confident of being able to divert all cargoes should China cargoes be cancelled. They also highlighted an opportunity for PCG to export more volumes to China given the cessation of production especially from producers in the middle of China. Thus, implying a shortage once manufacturing activity picks up again.

Pengerang: PIC is essentially completed and is undergoing commissioning in stages. At best commercial production will begin in late 1H20 with average plant utilisation of c.60%-70% targeted (on a full year basis). Management are targeting to achieve EBITDA breakeven in FY20.

Future projects. Management guided that they are looking at potentially 3 more FID to materialize in the next 2 years with capex ranging USD150m-USD300m. These plants will mop up the excess molecules from Kertih and Pengerang and are correlated to specialty chemicals. We understand that they are intermediate chemicals related to rubber gloves & personal care.

Outlook. Management expects plant utilisation to hit c.95% for FY20 (FY19: 92%). Despite this, we continue to expect ASP’s to remain soft due to weak demand against the backdrop of sluggish global economic growth, further compounded by the onset of the Covid-19 epidemic.

Forecast. Unchanged.

Maintain HOLD, TP: RM6.12. Maintain HOLD rating and unchanged TP of RM6.12 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 - 28 Feb 2020