PCHEM is expecting a stronger 2H16 on the back of the fully operational SAMUR facility while petrochemical prices are set to stabilise on firmer demand. Although 2Q16 results came below our estimate as we imputed higher ASP assumptions, it was actually a good set of earnings with noticeable improvement in operational efficiency, which saw it achieving the highest utilisation of 95% since 2010. Post-earnings revision on ASP adjustment, our new price target is now RM7.18/share. We maintain OUTPERFORM call for its long-term growth story driven by the RAPID project in 2020.

2Q16 below our forecast. PCHEM reported 2Q16 results, which came below our expectation with 1H16 core net earnings of RM1.30b making up 42% of our FY16 estimates owing to our overly bullish assumption on ASP. However, the results were in line with consensus where the earning accounted for 47% of FY16 estimates with the expectation of a strong 2H16 on the back of the fully operational SAMUR facility. It declared a 1st interim NDPS of 7.0 sen in 2Q16 (ex-date: 22 Aug; payment date: 24 Aug) which was lower than the 8.0 sen paid in 2Q15.

But overall a better quarter. The headline 2Q16 net profit of RM462m which included a RM241m one-off asset write-off owing to the cancellation of the elastomers project for RAPID. Ex-EI, 2Q16 core net profit rose 19% QoQ to RM703m from RM592m in 1Q16 as revenue inched up 2%. This was mainly attributable to higher plant utilisation (PU) to 95%, the highest level since 2010, from 92%, higher sales volume and improved product spreads, especially for Fertilisers and Methanol (F&M) segment, which led overall EBITDA margin improving to 38% from 36% previously. However, the earnings growth was partly capped by the weakening of USD against MYR.

Sales volume led growth. 2Q16 topline fell 3% YoY to RM3.20b from RM3.31b mainly attributed to the lower ASP, especially for the Olefins and Derivatives (O&D) segment while PU improved to 93% from 84% boosting the group PU to 95% from 78%. With higher PU, sales volume also improved significantly coupled with the strengthening of USD against MYR and 2Q16 core profit leapt 26% from RM557m in 2Q15. YTD, 1H16 earnings expanded 11% to RM1.30b from RM1.16b thanks to the same reason as above on higher sales volume and USD effect while revenue dipped slightly by 1% on lower ASP as crude oil prices plunged. PU improved to 94% from 84% previously.

Mixed price outlook in 3Q16. Management guided F&M to remain challenging on weak demand and ample supply issues for urea and ammonia while methanol prices are set to stabilise on firm demand. Nonetheless, market for O&D is expected to be stable given firmer demand. Having said that, PU is expected to be above 90% in FY16, which should help to boost profit margin. In addition, the new SAMUR facility which already has started in stages from 1Q16 could add additional 1.2m mtpa of urea and 740,000 mtpa of ammonia capacities when completed.

Keep OUTPERFORM. We have trimmed FY16/FY17 estimates by 6%/4% to account for lower ASP assumptions. 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. Thus, we keep our OUTPERFORM rating unchanged. However, price target is now lowered to RM7.18/share from RM7.31/share post-earnings revision based on -1SD 3-year moving average of 16.6x CY17 from 16.3x previously. Risks to our call are unexpected lower PU rate and sharp drop in ASP, which will impact our forecast significantly.

Source: Kenanga Research - 10 Aug 2016