PCHEM’s 2019 results were below our and the street’s forecast by 13- 15%, dragged down by a weaker F&M segment and weak margins at the O&D segment. More details will be shared in the results conference call on 27 February (3pm) as to whether there are any one-offs that resulted in the higher operating costs (+36% qoq) dragging down the EBITDA margin (-13ppts qoq). In line with the weak results, no special dividend was declared by PCHEM. YTD payout totalled 18sen, 43% lower compared to 32sen in 2018. We upgrade our rating to Hold from Sell on valuation but at lower target price of RM6.00.

2019 Results Missed Our and Consensus Forecasts by 13-15%

PCHEM reported 4Q headline profit of RM340m (-39% qoq, -74% yoy). After stripping out the non-core items (inventory write-backs), core profit fell to RM278m (-55% qoq, -79% yoy). While full-year plant utilisation was relatively flat at low 90%, 2019 core profit fell 45% yoy, impacted by lower product ASP, margin compression (particularly in 4Q19) and losses at the associate level dragged by its Aroma plant with low plant utilisation.

Sharp Drop in O&D Segment Margin

• Olefins & Derivatives (O&D) revenue and EBITDA fell 20% and 71% yoy. Both production and sales volumes came in lower, with plant utilisation at 98% (vs. 100% in 4Q18). Notably, EBITDA margin fell sharply to a historical low of 11.5% in 4Q19 (more clarity likely in its upcoming results conference call).
• Fertiliser & Methanol (F&M) revenue and EBITDA declined by 22% and 30% yoy with lower plant utilisation (83% vs 89% in 4Q18) as the methanol plant underwent a maintenance shutdown. Likewise, ASPs continued to be on a declining trend, although offset by higher sales volume.

Upgrade to Hold, Lower TP to RM6.00

We trim our 2020-21E EPS by 6-10% as we expect a potential slowdown in the economic environment to affect PCHEM demand. We lower our target price to RM6.00 (from RM6.40), pegged to an unchanged 16x PER (the historical average), but upgrade the stock to a Hold on valuation grounds. Risks to our call include: fluctuations in product ASP and better- /less-than-expected global demand.

Source: Affin Hwang Research - 27 Feb 2020