PCHEM’s weaker 1Q19 core net profit was below our forecast, despite our forecast already being below consensus. The prolonged trade war continued to put pressure on product ASP. As such, we lower our earnings forecasts. We maintain our BUY rating as we roll forward our valuation horizon and raise our target price to RM10.10.

Lower ASP and Plant Utilisation, Partly Mitigated by Stronger US$

1Q19 core net profit fell 31% yoy to RM845m, falling short of our and consensus estimates – accounting for 20% and 18% of respective full-year forecasts. The weaker revenue (-17% yoy) was mainly impacted by lower product ASP and sales volume, weaker F&M plant utilisation (-8% yoy) as the PC Methanol plant underwent maintenance, but partly mitigated by a firmer US$ (+4% yoy). As a result of the lower revenue coupled with higher maintenance and turnaround opex spending, EBITDA fell by 4.8ppts yoy to 33.3%.

Focus on Specialty Chemical Ventures

PCHEM’s recent proposed acquisition of a 100% stake in Da Vinci Group (DV), a Netherland based company, aims to strengthen its current footprint in the specialty chemical business. DV is an own brand reseller and producer of silicone, which contributes to 78% of its total revenue with the remaining 22% from lube additives and chemicals. The deal is valued at RM761m (~8% of its net cash) and is expected to be completed by 4Q19. As the deal has yet to be finalized and with no financial details being shared at this juncture, we have not included any financial contribution from this acquisition.

Maintain BUY

Despite our previous earnings cut, the results were still below our expectations, as such, we further lower our FY19E earnings by 6% to factor in the prolonged negative impact of the trade war by tweaking our O&D ASP assumption. Nevertheless, we believe the recent price weakness presents a good opportunity to accumulate the stock as valuation still looks appealing once additional volume growth from RAPID expansion (98.3% completed) comes on stream in FY20. We raise our target price to RM10.10 (from RM9.20), after rolling forward our valuation horizon to FY20E earnings and based on an unchanged 17x PER. Maintain BUY. Downside risks: weak product ASPs, weaker product demand and RM strengthening.

Source: Affin Hwang Research - 27 May 2019