1Q20 core net profit of RM493.0m (+45% QoQ, -39% YoY) came in below expectations. This is largely due to weaker-than-expected contribution from both (O&D) and (F&M) segment due to soft ASP’s amidst demand destruction. Thus, we slash our FY20-21 earnings estimates by 42%-28% on weaker ASPs and margins. Downgrade to SELL with a lower TP of RM4.42 (from RM5.06) pegged to 6x mid-FY21 EV/EBITDA.

Results below expectations. 1Q20 core net profit of RM493.0m (+45% QoQ, -39% YoY) came in below expectations accounting for 16.4%/21.6% of our/consensus full year estimates. The negative deviation largely stemmed from weaker-than-expected contribution from both (O&D) and (F&M) segments.

QoQ. Core earnings improved 45% from RM340m in 4Q19 as the group’s utilisation rate improving to 94% from 89% QoQ and lower opex arising from the lower statutory turnaround and maintenance activities undertaken and a lower effective tax rate (12.9% vs. 15.4% in 4Q19). This marked improvement QoQ was led by the F&M segment which experienced a 25% growth at the EBITDA level QoQ mainly due to lower operating costs, namely fuel.

YoY. Core earnings declined by 39% YoY from RM802m on weakness in both operating segments (group plant utilisation: c.89% comparable YoY). Weakness in the O&D division is due to mainly weaker ASPs (-14% YoY) despite achieving higher production and sales volumes, mirroring the decline in crude oil prices and the demand destruction arising from Covid-19. This resulted in EBITDA declining by 82% whilst corresponding margins plummeted by 24ppts YoY (to 8%). The F&D segment, recorded a lower utilisation rate of 90% (vs. 92% SPLY) with EBITDA decline by 12% YoY on softer ASP’s.

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 and the resulting demand destruction. Furthermore, whilst production volumes should improve in tandem with the higher utilisation rates, sales volumes are expected to be hampered due to deferment of shipments arising from tighter port controls as a result of the MCO. This was further compounded by weaker ASP’s, which remains the key determining factor in the decline in profitability.

Pengerang. PIC starts up plans remain in place. As at end March 2020, PIC PetChem is 99.99% complete. Performance test runs being undertaken and are expected to be completed by 2H20 before commercial production commences.

Forecast. We reduce our FY20-21 earnings estimates by -42% /-28% respectively on lower contributions from O&D and F&M segments in view of weaker ASPs and lower margins. We introduce our FY22 numbers.

Maintain HOLD with lower TP: RM4.42. Post earnings adjustment, we downgrade our call to SELL from a Hold rating with a lower TP of RM4.42 (from RM5.06). We take this opportunity to roll our valuation into mid-FY21. Our TP is based on a multiple of 6x mid-FY21 EV/EBITDA.

Source: Hong Leong Investment Bank Research - 21 May 2020