PCHEM reported a weaker 1Q16 which fell short of our expectation as ASP declined while the strengthening of MYR also worked against them. Having said that, sales volume improved in tandem with plant utilisation as feedstock supply improved. Despite trimming our forecasts due to lower ASP assumption, we continue to rate PCHEM an OUTPERFORM with new price target of RM7.31/share for its long-term growth story driven by the RAPID project in 2020.  1Q16 below. PCHEM reported 1Q16 results, which came below expectations with net profit of RM592m making up only 17% of our full-year FY16 estimates and 21% that of market consensus. Despite expecting a strong 2H16 on the back of the fully operational SAMUR facility, our forecasts were too bullish due to higher ASP assumption. No dividend was declared in the quarter as expected as traditionally PCHEM only pays dividend twice a year in 2Q and 4Q.  

Volume improved but ASP continued to decline. The 1Q16 earnings which fell 16% QoQ to RM592m was attributable to: (i) 9% decline in revenue, and (ii) higher taxation of RM225m or effective tax rate of 25% vs. RM121m or effective tax rate of 13% in 4Q15. The decline in topline was mainly due to continued contraction of ASP as well as the appreciation of MYR against USD. However, sales volume improved as plant utilisation (PU) improved to 92% from 86% in the preceding quarter, as both Olefins and Derivatives (O&D) and Fertilisers and Methanol (F&M) reported higher PU of 97% and 89% from 95% and 79%, respectively.  

Plant utilisation remained high. Similar to sequential comparison, 1Q16 results also registered lower ASP impacted by sharp decline in crude oil prices, higher sales volume which was backed by higher PU on a YoY basis. Net profit fell slightly by 2% from RM605m as revenue remained flattish at RM3.15b. PU for O&D inched up 97% from 95% due to higher supply of ethane and naphtha, which offset the impact of statutory turnaround at its propylene plant. Likewise, PU for F&M also improved to 89% from 87% as higher methane supply. However, ASPs for urea, ammonia and methanol were all lower.  

Price outlook remains challenging. Management guided F&M to remain challenging on weak demand and ample supply issues for fertiliser with challenging methanol prices due to weak crude oil prices. Nonetheless, market for O&D is expected to be stable given tight supply in the region. Having said that, plant utilisation is seen to improve further to 90% in FY16 with similar two statutory turnaround activities. In addition, the new SAMUR facility will start in stages from 1Q16 with the whole facility fully operational by 2H16. This could add additional 1.2m mtpa of urea and 740,000 mtpa ammonia capacities.  

Still OUTPERFORM. We have trimmed FY16/FY17 estimates by 12%/9% as we lowered our overall APS assumption by 8%. Despite this, we are still positive on PCHEM for its long-term growth story, which will be driven by the high profile RAPID project by 2020. We are rolling-over our valuation base-year to CY17 with a lower -1SD 3-year mean of 16.3x CY17 PER from -0.5 SD 3-year mean of 17.3x CY16 PER given the continued ASP weakness. Our new price target is now RM7.31/share from RM7.50/share. Risks to Our Call are unexpected lower PU rate and sharp frop in ASP which will impact our forecast significantly.

Source: Kenanga Research - 10 May 2016