3Q20 core loss of -RM1.4m (QoQ: -RM0.7m, -YoY: RM5.4m) and 9M20 core profit of RM0.5m (-96.6% YoY) was way below expectations, constituting just 3% of our forecast due to softer than expect chemical margins as a result of lower ASP for chlor-alkali products and continued associate losses from its associate ORICA. We cut FY20 earnings by -82/46/37% in view of continued weaknesses in the chemical segment and our intrinsic value forecast is reduced from RM1.47 to RM0.80 based on 12x (unchanged) FY21 EPS in view of continued weaknesses coming from low caustic soda prices and low utilisation rate for its PGW1 plant. We advise investors to ACCEPT the generous takeover offer at RM3.10/share from Batu Kawan (BKB) in view of the company’s weak fundamentals.

Below expectations. CCM reported 3Q20 core loss of -RM1.4m (QoQ: -RM0.7m, YoY: RM5.4m) and 9M20 core profit of RM0.5m (-96.6% YoY) accounting for 3% of our FY20 estimates. The results were below expectations due to softer margins from the chemical division due to weak caustic soda prices. No dividend was declared during the quarter (none declared SPLY), as expected. 9M20 core profit of RM0.5m was derived after adjusting for provision for receivables amounting to RM0.6m.

QoQ. Revenue was up by 2.3% due to marginally higher revenue from its chemicals and polymers segment. Lower chemical segment PBT of RM0.03m (-50% QoQ) was primarily attributable to lower ASP for its chlor-alkali products and lower utilization of its caustic soda plants. However the weakness in its chemical division was offset by commendable polymer sector performance as PBT came in flat at RM5.5m (+0.1% QoQ). Consequently, CCM recorded a core loss of -RM1.4m (QoQ: -RM0.7m).

YoY. Revenue increased by 9.7% YoY (from RM96.9m) due to higher caustic soda trading sales volume. Quarterly benchmark caustic soda prices declined by c.-25% YoY which resulted in a margin squeeze for CCM as the company has only managed to record a PBT amounting to RM0.03m (-99.4% YoY). However, weak chemical segment results were offset by stronger YoY polymer segment performance. The polymer segment saw its PBT increasing by 48.3% YoY (from RM5.4m). Consequently, CCM recorded a core loss of -RM1.4m (YoY: RM5.4m).

YTD. Core profit of RM0.5m (-96.6% YoY) was primarily attributable to weaker chemical segment performance, mitigated by improved polymer segment contribution.

Outlook. We expect to see tougher times ahead for CCM as caustic soda prices are still on the downtrend due to Covid-19 and lower overall economic activity. Its polymer division has also failed to see a material increase in its ASP despite the exponential increases in ASP for glove players. This indicates the lack of pricing power for both its business segments as (i) caustic soda ASP follows an international benchmark and (ii) polymer division is in a competitive industry with low barriers to entry.

Forecast. We trim our FY20-22f numbers by -82/46/37% as we factor lower earnings contribution from its chemical segment.

ACCEPT takeover offer from BKB at RM3.10. We advise investors to accept the takeover offer at RM3.10/share from BKB as we believe that the intrinsic value of this stock is significantly lower than the takeover price.

Source: Hong Leong Investment Bank Research - 26 Nov 2020