Period  2Q14/1H14

Actual vs. Expectations Although management had already forewarned of a weaker 2Q14 due to the heavy turnaround activities (during the previous results briefing), the reported 2Q14 net profit of RM555m is still somewhat disappointing as the 1H14 net profit of RM1.30b only accounted for 35% of our FY14 full-year estimates and 36% of market consensus.

 The weaker-than-expected results were mainly due to lower utilisation rate at Olefins & Derivatives (O&D) of only 65% in 1H14 compared to our fullyear assumption of 88%.

Dividends  An 8 sen NDPS was declared in 2Q14, (ex-date: 22/08/14; payment date: 12/09/14) which is the same as in 2Q13.

Key Results Highlights 2Q14 net profit contracted 26% QoQ to RM555m from RM749m in 1Q14 while revenue fell 12% as the O&D segment undertook two statutory turnarounds (second smaller cracker and MTBE plant) and a planned maintenance activity at its aromatics plant in 2Q14 as compared to only one statutory turnaround for Fertilisers & Methanol (F&M) in 1Q14. As such, the group’s utilisation rate dipped to 76% from 80% as O&D’s utilisation rate fell sharply to 65% from 97% while F&M improved to 85% from 67%. The lower earnings were also attributed to thinner products spreads for O&D and lower ASP for F&M.

 YoY, the 2Q14 net profit plunged 42% from RM958m in 2Q13 while revenue dropped 14%, as there were no heavy turnaround activities in 2Q13. As such, the group’s utilisation rate in 2Q13 was higher at 83% with O&D at 87% and F&M at 80%. Similar to the QoQ comparison, the weakened YoY results were also attributed to lower products spreads at O&D and lower prices for F&M.

Outlook  PCHEM is expected to take one more statutory turnaround activities at F&M’s smaller methanol facility in 3Q14. This will mark the end of the heavy statutory turnaround cycle which started in 3Q13. But, this is expected to have minor impact to 3Q13 results. Together with expected improving product prices in 2H14 except for urea and aromatics, Earnings are set to recover in 2H14 onwards.

Changes To ForecastsWe trim our FY14E/FY15E EPS by 9%/2% as we changed our utilisation rate for O&D to 75%/84% from 88%/89% while F&M to 83%/80% from 70%/73%. But, we raise FY16E estimates by 5% as we upped F&M’s utilisation rate to 85% from 80% while keeping O&D’s unchanged at 92%.

Rating Maintain OUTPERFORM

Valuation  Target price is now reduced to RM7.19/share from RM7.31/share, based on unchanged CY15 15x PER (the highest band of PER since Mar-12)

Risks to Our Call A reversal of the current strong USD/MYR rate, a sudden drop in crude oil prices and an unexpected lower plant utilisation rate.

Source: Kenanga