Period  3Q14/9M14

Actual vs. Expectations  Although net profit rose 19% QoQ, the 3Q14 result was somehow disappointing as the YTD 9M14 net income of RM1.96b still fell short of expectations as it made up only 58%/59% of house/street’s FY14 full-year estimates.

 The main discrepancy was mainly due to the unexpected drop in 3Q14 plant utilisation to 75%, which was caused by methane gas supply limitation, resulting in 9M14’s utilisation rate of 77% compared to our full-year assumption of 79%.

Dividends  No dividend was declared as expected.

Key Results Highlights

 3Q14 net profit leapt 19% QoQ to RM661m from RM555m while revenue grew 6% over the quarter. This was largely thanks to only one turnaround activity vs. three turnaround activities in 2Q14. However, overall plant utilisation drop unexpectedly to 75% from 76% due to methane gas supply limitation. Without this problem, the utilisation rate would have been higher at 88%. Olefins & Derivatives (O&D) reported 47% surge in EBITDA as revenue jumped 22% due to higher ASP for ethane-based products as well as the absence of turnaround activity for this segment in 3Q14 as compared to three turnarounds previously. However, Fertilisers & Methanol (F&M) saw lower EBITDA by 45% as revenue fell 26% due to the gas supply limitation and one turnaround activity in 3Q14.

 YoY, the 3Q14 net profit grew 4% as revenue inched up 1% from 3Q13. This was due to higher utilisation rate of

75% from 70% as 3Q13 had four turnaround activities. O&D posted EBITDA, which rose 15% on the back of 3% hike in topline thanks largely to higher ASP and the absence of turnaround activity in 3Q14. Although ASP for Fertilisers strengthened, gas supply limitation had pulled F&M’s EBITDA lower by 23% as revenue contracted 12%.

Outlook  Operationally, 4Q14 is a better quarter given that the statutory turnaround activities had already been completed in 3Q14 while there should be no more gas supply constraint in 4Q14. However, prices for O&D are expected to be soft in 4Q14 on weakening oil and naphtha values coupled with bearish demand, while price outlook for F&M is mixed. Generally, management guided a challenging price outlook for 2015 on additional capacity but likely to rebound in 2016 as demand increases.

Changes To Forecasts   We trim our FY14E/FY15F/FY16F estimate by 14%/7%/3% on the back of: (i) utilisation rate for F&M to 80% from 82.5% in FY14E, (ii) USDMYR assumption of 3.28/3.20 from 3.19/3.15 for FY15E/FY16E, and (iii) oil price benchmark of 97/98/96 per USD/bbl from 102/107/103.

Rating Maintain OUTPERFORM

Valuation  Price target is now reduced to RM6.68/share from RM7.19/share previously, based on unchanged CY15 15x PER which is -1SD from the 3-year mean.

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