PCHEM’s 3Q17 net profit came in at RM913m, bringing 9M17 to RM3,172m (+63% yoy), which was above our and consensus expectations and constitutes 88% and 86% of our and street forecasts respectively. While overall plant utilisation for 9M17 was lower at 91%, favourable petrochemical prices and a stronger US$ which strengthened by 6% yoy, helped boost revenue by 28%. Cash balance was reduced by RM1bn qoq due to ongoing spending on the RAPID project and incurred plant turnaround costs (~RM100m). 4Q will see the Labuan methanol plant undergo its turnaround. Post the earnings upgrade, we raised our TP to RM8.25 (from RM8.00). Maintain BUY.

Marginal Yoy Improvement in 3Q17 Profit

PCHEM’s 3Q revenue rose 13% yoy to RM4,013m on higher sales volume contributed by SAMUR, more favourable product ASPs and bolstered by a 6% strengthening in the US$. Combined, these factors negated the negative impact from the lower plant utilisation (86% in 3Q17 vs. 3Q16’s 100%) due to a statutory turnaround. The better yoy 3Q revenue did not trickle down to net profit, which unfortunately only saw a 3% improvement yoy to RM913m. This was due to higher costs incurred for the turnaround activities during the quarter. 3Q EBITDA margin was 6.5ppts lower at 36.9%.

F&M Stole the Spotlight in 3Q

Despite lower plant utilisation recorded at both its Olefins & Derivatives (O&D) and Fertiliser & Methanol (F&M) segments, the marginally higher 3Q overall profit was mainly supported by a better F&M segment, which saw revenue rise by 39% yoy, as well as a 4ppts improvement in margins which saw EBITDA surge by 52%. Methanol prices, which track global prices showed improvement during the quarter vis-à-vis ammonia prices which continue to weaken due to a continuous oversupply situation.

Expected Margin to Expand From Fixed Ethane Costs; BUY

We raise our FY17E earnings forecast by 14% to reflect improved petrochemical prices, given the tighter supply in the market and global oil prices recovery of late. We also tweak our FY18-19E earnings slightly by +3% and +1% for the same reason. However, FY18E earnings growth is expected to be stagnant, mainly due to our house view of RM strengthening and as PCHEM undergoes another year of heavy turnaround activity. We maintain our BUY call and raised our TP to RM8.25.

Source: Affin Hwang Research - 10 Nov 2017