Period

1Q15

Actual vs. Expectations

Although 1Q15 net profit of RM605m made up only 20% of our FY15 estimates, we deem the results as largely in line with our expectation given that the crude oil price is recovering steadily of late to around USD70/bbl from the low of USD46/bbl. Against consensus estimates, the RM605m net profit accounted for 23% of full-year estimate.

Dividends

No dividend was declared in 1Q15, as expected.

Key Results Highlights

Despite plant utilisation (PU) rising further to 90% from 88%, 1Q15 core net profit fell 21% QoQ to RM605m on the back of 20% dip in revenue as ASP was lower following the sharp decline in crude oil prices when the Brent hit new low at c.USD46/bbl in early January. As such, both EBITDA for Olefins & Derivatives (O&D) and Fertilisers & Methanol (F&M) fell 26% and 6% respectively. On the positive side, production and sales volumes improved which in line with higher PU. This led to an improvement at group’s EBITDA margin to 36% from 34% on efficiency gains.

YoY, 1Q15 core earnings contracted 19% from RM748m as topline declined 17% although PU surged from 80% to 90%. The strong PU was due to the absence of statutory turnaround activity in 1Q15 vs. one turnaround at the urea plant last year. As such, EBITDA for F&M segment rose 18% as PU jumped to 87% from 67% previously. However, the overall group earnings were dragged down by O&D unit as ASP fell sharply following the plunge in crude oil prices. In addition, O&D had a better PU of 97% in 1Q14 vs. 95% in 1Q15, which led to slightly better production and sales volume.

Outlook

Generally, management guided a challenging price outlook for 2015 as crude oil prices have yet to settle at a comfortable level. However, price outlook for 2Q15 alone is improving for O&D segment, especially for polymers on the back of stronger feedstock prices. However, the outlook for F&M segment remains challenging especially for urea and ammonia on supply issue. Changes To

Forecasts

We keep our estimates unchanged for now.

Rating

Maintain OUTPERFORM

Valuation

We decided to upgrade our targeted PER to -0.5SD 3- year mean of 16x from -1SD 3-year mean of 15x given the improved crude oil prices. In fact, this new valuation is not excessive as opposed to its 3-year mean of 17x.

As such, with rolling over the valuation-base year to CY16 from CY15, our new price target is now raised to RM6.37/share from RM5.73/share previously.

Risks to Our Call

A reversal of the current strong USD/MYR rate, a sudden drop in crude oil prices and a lower PU rate.

Source: Kenanga Research - 8 May 2015