Period

3Q15/9M15

Actual vs. Expectations

3Q15 net profit of RM916m beat expectations bringing 9M15 net profit to RM2.08b, making up 81% both house and street’s full-year FY15 estimates. This was due to higher plant utilisation (PU) coupled with stronger ASP in MYR term.

Dividends

No dividend was declared as expected.

Key Results Highlights

3Q15 net profit soared 64% QoQ to RM916m; the strongest quarter since 2Q13 on the back of a 10% hike in revenue driven by higher sales volume coupled with higher ASP in MYR term. In fact, the ASP was lower in USD term but the sharp decline of MYR against USD resulted in a better ASP in MYR value. PU for Olefins and Derivatives (O&D) was nearly full at 99% from 84% in 2Q15 coupled with higher ethane supply, which boosted the segment’s EBITDA to RM1.01b with profit margin of 39% from RM768m with profit margin of 33% previously. On the other hand, Fertilisers and Methanol (F&M)’s larger methanol facility was shut down for heavier statutory turnaround in 3Q15, which was the same statutory turnaround at its Gurun urea facility in 2Q15. As PU improved to 79% from 73%, F&M posted EBITDA, which rose 23% to RM407m from RM332m with EBITDA margin improving to 40% from 35% previously.

YoY, 3Q15 net profit leapt 39% from RM661m in 3Q14 as revenue grew 3%. The improvement was largely driven by higher group’s PU of 88% from 75% in 3Q14 thanks to better plant and feedstock supply reliability. O&D saw its EBITDA rising 16% to RM1.01b from RM872m as PU improved further to 99% from 64% while F&M’s EBITDA surged 86% to RM407m from RM219m as PU increased to 79% from 64% previously. Likewise, YTD 9M15 net profit rose 6% to RM2.08b from RM1.96b in 9M14, although revenue fell 6%, attributable to higher PU of 85% from 77% coupled with lower feedstock costs for naphtha, propane and butane. The decline in topline was mainly due to lower ASP despite having higher sales volume and favourable exchange rate movement.

Outlook

Management guided for a better market condition for 4Q15, especially for O&D where petrochemical prices are expected to be firmer due to supply limitation whereas a mixed outlook for F&M is anticipated with better ammonia prices on limited supply availability while urea prices are expected to soften on lacklustre demand.

No statutory turnaround expected in 4Q15 while there are two statutory turnaround activities scheduled for 2016 which is the same as 2015. As such, PU is set to improve further to 90% in 2016.

The new SAMUR facility will start by stages from 1Q16 with the whole facility fully operational by 2H16. This could add 1.2m mtpa of urea and 740,000 mtpa ammonia capacity.

Separately, PCHEM announced yesterday that it is officially involved in the RAPID project and is acquiring three companies, namely PRPC Glycols Sdn Bhd, PRPC Polymers Sdn Bhd and PRPC Elastomers Sdn Bhd from its parent company, Petronas. These three companies will undertake petrochemicals projects, which are part of the RAPID project. PCHEM will pay the seller RM13,000 being the paid-up share capital of the project companies, and will assume the assets and the liabilities of c.USD110m. PCHEM is expected to spend a total capex of USD3.9b for the project and will add 2.7m mtpa capacity to the group once it is fully operational by 2019. Management expects the RAPID project to have no impact on its future dividend payout. Management plans to have a briefing on the RAPID project later this month. Changes To

Forecasts

We raise FY15/FY16 estimates by 8.6/10.3% to reflect the latest PU and the inclusion of SAMUR contribution next year. Our assumption does not take into consideration the RAPID project. Accordingly, NDPS also being upgraded proportionally based on 50% payout.

Rating

Upgrade to OUTPERFORM from MARKET PERFORM previously.

Valuation

With unchanged targeted benchmark of 0.5 SD below its 3-year mean, which is now at 17.3x PER in contrast to 16x PER previously, our new price target is now RM7.50/share from RM6.29/share based on CY16 earnings.

PCHEM has performed fairly well for an index-stock with 19% appreciation YTD. With better 4Q15 petrochemical prices, new earnings kicker from SAMUR next year and the growth story arising from the RAPID project, PCHEM is the stock to watch. Hence, we upgrade the stock to OUTPERFORM.

Risks to Our Call

An unexpected lower PU rate while ASP drops sharply.

Source: Kenanga Research - 4 Nov 2015