PCHEM posted an impressive set of 3Q16 results thanks largely to perfect plant utilisation rate of 100% coupled with improving sales volume while ASP was firmer. However, with statutory turnaround activities scheduled in the coming quarters, maintaining its current utilisation rate is tough. Despite having a long-term growth story for its RAPID project, we believe the near-term positives have been priced in following the recent share price recovery. Thus, we downgrade the stock to MARKET PERFORM with an unchanged target of RM7.18/share.

3Q16 inline. PCHEM posted 3Q16 results which came within our expectations with 9M16 core earnings of RM2.19b making up 76% of our FY16 estimates. However, the results beat market consensus where 9M16 earnings accounted for 81% of forecasts. The core earnings were adjusted for RM241m one-off asset write-off owing to the cancellation of the elastomers project for RAPID in 2Q16. No dividend was declared as expected as it usually pays half-yearly dividend.

Earnings led by 100% PU. 3Q16 net profit of RM891m jumped 27% QoQ from RM703m core earnings in 2Q16. This was largely attributed to another quarterly record of 100% plant utilisation (PU) from 95%, the highest level since 2010 as there was no statutory turnaround activity compared to one turnaround at the aromatics plant in 2Q16. As such, higher sales volume pushed revenue higher by 11% to RM3.56b coupled with improved ASP, especially for Olefins & Derivatives (OD) which led overall EBITDA margin improving further to 41% from 38% previously.

Sales volume led growth despite weak prices. 3Q16 revenue fell 2% YoY from RM3.64b owing to softer ASP while net profit slid 3% from RM916m largely due to higher taxation where the effective taxation rate was 22% in 3Q16 vs. 19% last year. In fact, at the pretax level, it reported higher profitability by 3% due to higher production, as PU reached 100% from 88%, as well as higher sales volumes. YTD, 9M16 core profit rose 5% to RM2.19b from RM2.08b despite revenue falling 2% as ASP declined. The better results were attributed to the same reason where higher PU of 96% from 85% helped to push production and sales volume higher. In addition, a strong USD also contributed to better earnings this year.

Firmer price outlook firmer but PU to come down. Although petrochemical prices are set to be firmer in 4Q16 on the back of tight supply and demand recovery, upcoming results could be weaker given the statutory turnaround in Oct-Nov as well as major turnaround activities at its Kerteh facility in 2Q-3Q next year, PU is expected to decline to mid-90% in 4Q16 and high-80% in FY17. As such, earnings could be weaker in the near future, but it should be mitigated by the new SAMUR facility which will start commercial operation by 4Q16.

Cut to MARKET PERFORM. Although we like PCHEM for its longterm growth story, which will be driven by the high profile RAPID project by 2020, the immediate lower PU could be an earning dampener. As such, we believe the positive has already been priced where the stock has risen 6% in the past three months. Thus, we downgrade the stock to MARKET PERFORM from OUTPERFORM with unchanged price target of RM7.18/share which is based on - 1SD 3-year moving average of 16.6x CY17 earnings multiplier. Risks to our downgrading are PU rate remaining high and a rally in petrochemicals prices.

Source: Kenanga Research - 3 Nov 2016