1Q20 core PATAMI of RM3.2m (-29.2% QoQ, -65.2% YoY) was slightly below expectations due to softer chemical margins and losses at their associate due to the MCO stop work order. We cut FY20 earnings by 6% and lower TP from RM1.44 to RM1.38 (12x FY20 PE). Coupled with share price run up of 45% since our last report on 11 Mar, we take this opportunity to downgrade to HOLD (from Buy).

Slightly below. CCM reported 1QFY20 results with revenue of RM96.6m (-2.7% QoQ,-0.4% YoY) and core earnings of RM3.2m (-29.2% QoQ, -65.2% YoY), accounting for 16% of our FY20 estimates. The results were softer than expected due to softer margins from the chemical division (ASP -21% YoY) and due to losses at its associate level to the quantum of RM1.1m due to the MCO stop work order in the period under review. In deriving our core earnings, we adjusted for EI’s totalling RM1.1m (consisting of (i) provision for trade receivables of RM0.4m and (ii) forex losses of RM0.7m).

QoQ. Revenue of RM96.6m was down -2.7% QoQ due to the lower average prices & volumes from the chemicals division, offset by higher volumes sold during the quarter from the polymers divisions in tandem with the robust demand from the gloves sector (Revenue: +7.3% QoQ). PBT declined to RM3.7m (-26.6% QoQ) cushioned by a surge in contributions from the polymers di vision (PBT: +37.0% QoQ; margin: +4.8ppts). Consequently, core PATAMI declined to RM3.2m (4Q19: RM2.6m) after adjusting for EI of RM1.1m (provisions of RM0.4m and forex losses of RM0.7m).

YoY. Revenue declined -0.4% YoY (from RM97.0m) on lower contribution from the chemicals division. Benchmark caustic soda prices declined -20.8% YoY from an average of USD375/DMT in 1Q19 to an average of USD297/DMT in 1Q20. The resulting margin squeeze (operating level: chemicals -8.6ppts, polymers +1.0ppts from better product mix & stronger demand from the glove sector) saw PBT declining to RM3.7m (-60.9% YoY). Subsequently, core PATAMI declined -51.3% reflective of the weaker operating leverage YoY.

Outlook. Coming off a low base in FY19, FY20 should see earnings growth coming back on track due to (i) PGW1 reactivation (commercial operations commenced in 2Q20) with +50% volume increase YoY, replacing c.28% of domestic imports, (ii) demand from gloves for polymers and chlorine should remain robust, in tandem with the lead time for gloves which is at c.6-12 months due to unprecedented demand arising from Covid-19 and (iii) overall increased demand for chemicals due to higher demand for hygiene products in general.

Forecast. We trim our FY20 numbers by 6% as we factor no contributions from the associates in FY20. We introduce our FY22 numbers.

Downgrade to HOLD TP: RM1.38. Downgrade to HOLD (from Buy) given the share price run up 45% since our last report on 11 Mar. Our TP decreases slightly to RM1.38 (from RM1.44) in light of our earnings cut. Our TP is a function of FY20 EPS of 11.5 sen pegged to a PE multiple of 12x.

Source: Hong Leong Investment Bank Research - 21 May 2020