Period

2Q15/1H15

Actual vs. Expectations

Below expectations. 1H15 net profit of RM1.16b only constitutes 38%/43% of house/street’s FY15 full-year estimates. This was due to lower-than-expected product prices coupled with lower plant utilisation on maintenance activities.

Dividends

First interim NDPS of 8.0 sen was declared in 2Q15, (entitlement date: 24 Aug; payment date: 09 Sep), which is the same amount as 2Q14.

Key Results Highlights

Despite revenue rising 5% as ASP improved on higher crude oil prices from 1Q15, 2Q15 net profit fell 8% QoQ to RM557m from RM605m previously, attributable to lower plant utilisation (PU) rate of 78% from 90% previously. There were two maintenance activities in 2Q15; (i) Gurun urea facility, and (ii) glycols and derivatives facilities, while there was none in 1Q15. As such, Fertilisers and Methanol (F&M) EBITDA plunged 30% to RM332m as PU fell to 73% from 87% previously. As a result, EBITDA margin fell to 35% from 45%. Meanwhile, better ASP helped to push Olefins & Derivatives (O&D) revenue higher by 13%, thus higher EBITDA by 18%. This brought EBITDA margin to 33% from 31%.

YoY, although 2Q15 net profit was flattish, PAT rose 9% as 2Q14 reported a lower minority interest of RM30m vs. RM81m in 2Q15. O&D EBITDA leapt 29% as there was only one turnaround activity for the segment compared to three turnarounds in 2Q14. However, the statutory turnaround activity in the Gurun urea facility dragged down F&M EBITDA by 18% as PU dropped to 73% from 85%.

YTD, 1H15 net profit declined 11% YoY to RM1.16b from RM1.30b on narrower product spreads while revenue contracted 10% as ASP fell on the back of the plunge in oil prices.

Outlook

Management guided for a weaker market condition going into 3Q15 as crude oil prices are still volatile. This is especially so for O&D which petrochem prices are still expected to be softer on supply issue whereas F&M prices are set to be firmer on demand dynamics. On the other, the CFO guided that for every 10.0 sen of depreciation in MYR against the USD, group’s EBITDA could improve by 6% assuming other cost structure and PU remain unchanged. Changes To

Forecasts

We cut FY15 estimates by 16% after adjusting for lower ASP as we were over-optimistic in our 1H15 assumptions. We also trim FY16E EPS by 1% on finetuning arising from the FY15 adjustment.

Rating

Downgrade to MARKET PERFORM from OUTPERFORM due to limited upside.

Valuation

With the unchanged targeted CY16 PER of 16x based on 0.5 SD below its 3-year mean, our new price target is now RM6.29/share from RM6.37/share previously.

Risks to Our Call

An unexpected lower PU rate while ASP drops sharply.

Source: Kenanga Research - 10 Aug 2015