PCHEM 1Q20 results missed our expectations. Its business was broadly affected by softer product average selling prices (ASP) following the crash in global oil prices. However, F&M earnings rebounded as plant utilisation recovered to 90% with lower turnaround cost incured. We lower our 2020E earnings by 7% but raise our target price to RM4.00 after rolling forward our valuation horizon. Reaffirming our Sell rating on the challenging low oil price environment.

Results Achieved 24% of Forecast But Deemed a Miss

1Q20 core net profit fell 33% yoy to RM569m in tandem with weaker revenue, broadly affected by weaker product ASP, partly cushioned by resilient sales volume and strengthening of the US$. Margins compressed by 5.6ppts and EBITDA resultingly contracted by 22% yoy. Despite achieving 24% of our previous PATAMI forecast, revenue missed our assumption by 5% with the deviation mainly coming from weaker-than-earlier-expected ASPs. RAPID is scheduled to commence production in 2H20 but would likely see negative contribution at the EBITDA level. Despite the weak global outlook, management highlighted that there have been no signs of volume being affected and/or contract cancellations, with May and June volume already 97% booked. ASPs are showing some moderate recovery from May onwards.

Core Net Profit Up 1 Fold Qoq Due to Low Base

 Olefins and Derivatives (O&D) revenue and EBITDA fell 7% and 37% qoq impacted by lower product ASPs. Sequential sales volume saw some shipments being deferred as ports were under tighter control following the COVID19 outbreak. This also led to a suppressed EBITDA margin, another historical low level at 7.8%, down 3.7ppts.

 Fertiliser and Methanol (F&M) also saw revenue slip by 13% qoq, impacted by lower product ASP and deferred shipments. However, the better EBITDA margin (+14ppts) lifted EBITDA by 25% qoq with plants resuming back to 90% (vs 83%) and lower maintenance costs.

Maintain SELL

We roll forward our valuation horizon to 2021E and raise our target price to RM4.00, based on an unchanged 13x PER. We reaffirm our Sell rating as we remain cautious and highlight the potential risks of a weaker demand amid the weak economic environment. Upside risks: sharp rebound in product ASPs, recovery in product demand, quicker breakeven of new Pengerang complex and further strengthening in US$.

Source: Affin Hwang Research - 22 May 2020