PCHEM reported a strong set of 2Q18 results, with core PATAMI jumping 42% yoy to RM1,372m. The results exceeded our and consensus forecasts mainly on a lower tax rate, and driven by overall rising product ASPs. We reaffirm our BUY call and raise our TP to RM10.00. A higher 14sen interim dividend was announced (2Q17: 12sen)

2Q18 Results Above Expectations

The 42% yoy earnings growth in 2Q was attributed to the higher revenue of RM4,733m (+19.6% yoy). This was on the back of higher overall product ASPs, and an improved plant utilisation at the F&M segment as a result of lower maintenance activities at the ammonia and urea plants. EBITDA margin was relatively flat yoy at 40% despite the higher revenue due to a lower product spread as the Ringgit strengthened.

Sequential Analysis

Sequential revenue declined 4.4% to RM4,733m mainly due to the lower O&D plant utilisation resulting from higher maintenance activities, partly offset by the overall improvement in product ASPs. Despite the weaker revenue, core net profit rose 12.6% due to a lower tax impact relating to the SAMUR project and better margins as the US$ strengthened qoq.

More Positive Outlook; PIC Capacity Expansion in 2020

Our 4-10% EPS forecast upgrades for 2018-19E mainly factor in better product ASPs (ie: polymers, urea, ammonia and methanol), and a 1ppt lower effective tax rate of 15%. We also raised our 2020E EPS by 11% to factor in the additional capacity expansion once the PIC plant becomes operational. This will add another 1.9mtpa, increasing its capacity by ~15% to 14.6mtpa.

Maintain BUY

Despite the share price having already appreciated by 21% ytd, we believe PCHEM will see more upside as it benefits from favourable product spreads, which will help partly offset the anticipated weaker 2H plant utilisation. We maintain our BUY call and raise our 12-month TP to RM10.00 (from RM9.60), based on an unchanged 17x PER on the higher 2019E EPS.

Source: Affin Hwang Research - 16 Aug 2018