PCHEM posted another commendable set of results in 4Q16 thanks largely to strong USD-led ASP coupled with the weakening of MYR despite lower sales volumes. ASP outlook remains rosy in the near term given the tight supply and demand situation as well as the recovery of crude oil prices. Having said that, we believe the positives have already been priced-in following its recent outperforming share price. We maintain MARKET PERFORM rating at target of RM7.65/share.

4Q16 above. PCHEM posted 4Q16 results, which came above expectations with full-year FY16 core earnings of RM3.17b beating house/street?s estimates by 11%/15%, respectively. This was due to higher-than-expected revenue, which was led by high USD priced- ASP and the weakening of MYR. The core earnings were adjusted for a RM241m one-off asset write-off owing to the cancellation of the elastomers project for RAPID in 2Q16. A final NDPS of 12.0 sen was declared (ex-date: 03 Mar; payment date: 21 Mar), bringing FY16 NDPS to 19.0 sen, higher than FY15?s 18.0 sen and our estimates of 17.9 sen.

Earnings boosted by ASP and weaker MYR. Despite plant utilisation (PU) declining from record of 100% to 96%, which led to lower production and sales volumes, 4Q16 reported 11% QoQ jump in net profit to RM987m while revenue rose 11% to RM3.95b over the quarter. This was largely due to higher ASP as crude oil prices were firmer and gains in MYR base on stronger USD. On the other hand, the lower PU was reflected in its EBITDA margin, which declined to 38%, still fairly impressive, from 41% previously. The decline in PU was expected given the statutory turnaround in Oct-Nov last year.

Still volume-led growth for yearly comparison. Both 4Q16 and FY16 core profits grew 40% and 14% to RM987m and RM3.17b with revenue rising 14% and 2%, respectively, from 4Q15 and FY15. This was mainly attributable to higher sales volume on the back of higher PU of 96%/96% from 86%/78% previously, coupled with stronger USD against MYR. However, 4Q16 ASP was lower compared to 4Q15 for Fertilisers and Methanol (F&M) while higher ASP for Olefins and Derivatives (O&D) were seen as crude oil prices recovered. For FY16, ASP for O&D was adversely affected by weaker crude oil price while product prices for F&M declined across the board.

Price outlook firmer but PU to come down. PCHEM is expecting further firmer petrochemical price in the near term given the limited supply, seasonal demand and stable energy price for O&D while strong demand and supply limitation are expected to push F&M prices higher. However, PU is set to come lower at high-80% in FY17 on major turnaround activities at its Kerteh facility in 2Q-3Q. However, downside should be mitigated by the new SAMUR facility which will start commercial operation by early this year. While we keep FY17 estimates unchanged, we introduce our new FY18 forecast with 10% growth.

Maintain MARKET PERFORM. We decided to upgrade our target PER on PCHEM to 17.7x which is based on 3-year moving average given the strong earnings as well as stronger petrochemical prices, from the -1SD 3-year moving average of 16.6x. Thus, new price target is raised to RM7.65/share from RM7.18/share. As the positives may already been priced-in following the recent strong price performance, we maintain our MARKET PERFORM. Risks to our neutral call are PU rate remaining high and a rally in petrochemicals prices.

Source: Kenanga Research - 21 Feb 2017