2Q20 core net profit of RM185m (-46% QoQ, -83% YoY) and 1H20 core profit of RM678m (-65% YoY) came in within expectations despite constituting only 35% of our FY20 forecast. The weak 2Q20 result was largely due to weaker contributions from both (O&D) and (F&M) segment due to soft ASP’s amidst the crash in oil prices. General product ASPs have since recovered in tandem with oil prices, we believe that the stock is currently fairly valued as share price has recovered significantly from its low s while ASP for most of its products have been increasing steadily. The Company has also declared a dividend of 5sen/share (vs 11sen/share in 2Q19; ex-date: 7 Sep 2020). Upgrade to HOLD from Sell at TP of RM5.90 based on 9x FY20 EV/EBITDA.

Results within expectations. 2Q20 core net profit of RM185m (-46% QoQ, -83% YoY) and 1H20 core profit of RM678m (-65% YoY) came in within our expectations accounting for 35%/37% of our/consensus full year estimates. We expect a much stronger 2H20 due to the recovery in oil prices and demand from the relaxation of lockdown measures globally. The Company has also declared a dividend of 5sen/share (vs 11sen/share in 2Q19; ex-date: 7 Sep 2020).

QoQ. Core earnings declined by 46% mainly due to lower overall ASPs. The group’s utilisation rate declined to 100% from 103% QoQ and effective tax rate was also higher in 2Q20 (36.5% vs. 15.4% in 1Q20). The QoQ declines were uniform across both O&D and F&M segments due to lower overall product prices from a sharp plunge in demand as a result of the Covid-19 pandemic.

YoY. Core earnings declined by 83% YoY from RM1120m on weakness in both operating segments (group plant utilisation: c.100% comparable YoY). Weakness in the O&D division is mainly due to weaker ASPs on the back of lower 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 92% whilst corresponding margins plummeted by 9ppts YoY (to 19%). The F&D segment recorded a lower utilisation rate of 101% (vs. 107% SPLY) while EBITDA declined by 87% YoY on softer ASPs.

YTD. 1H20 revenue and profit were down 17% and 65% respectively primarily due to lower ASPs while average YTD group utilisation was at 97% (+5% from FY19).

Outlook. We expect overall plant utilisation to end the year at c.94% (vs 97% in 1H20; FY19: 92%) on slightly higher plant turnaround activity in 2H20. We believe that the worst is over for PCHEM with regards to ASPs as product prices have recovered significantly from its 2Q20 lows, average 3QTD polyethylene and urea prices are already higher than its 1Q20 average. We also believe that O&D segment would see its profitability improving significantly from higher oil prices in 2H20 compared to 2Q20. While methanol prices are expected to remain weak as methanol is heavily linked to t industrial usages, which is expected to go through a slower recovery. Despite the positive ASP outlook for its products, the recovery of PCHEM’s share price was steeper than most of its products.

Forecast. We maintain our forecast for FY20-22 as 1H20 results was within our expectations despite constituting only 35% of our forecast as product prices have already recovered significantly thus far and is expected to last until the end of this year.

Upgrade to HOLD with TP: RM5.90. We upgrade our call from Sell to HOLD based on 9x EV/EBITDA (previously 8x) due to our expectations of a stronger 2H20. We believe that PCHEM is fairly valued at this juncture as the recovery of its ASPs are still lagging behind the speed in which its share price has recovered. Its FY20 P/E of 24.4x is +2SD higher than its 3-year historical average mean P/E of 16.2x. We believe that a continuous recovery in crude oil prices (positively correlated to most product prices) is first required for us to warrant an upgrade of our call to a Buy.

Source: Hong Leong Investment Bank Research - 21 Aug 2020