PCHEM posted its most profitable quarter in 1Q17, which was largely led by strong USD-priced ASP and volume growth as plant utilisation was nearly 100%. However, we expect the coming quarters to be weakened on softer ASP outlook while plants are scheduled for turnaround activities in the next three quarters. Even then, FY17 is still set to be a record year. With its recent weakness in share price, there is a buying opportunity for its growth story. Thus, we upgrade the stock to OUTPERFORM with revised price target of RM8.09/share.

1Q17 above. At 37%/39% of house/street’s FY17 estimates, 1Q17 net profit of RM1.30b came above expectations, which was due to (i) strong USD priced-ASP and (ii) persistent low effective tax rate of 16% vs. our FY17 assumption of 25%. No dividend was declared in 1Q17 as expected as it usually pays half-yearly dividends.

Strong ASP and volume growth sequentially. 1Q17 net profit surged by 31% QoQ to RM1.30b on the back of 19% hike in revenue. This was largely driven by (i) higher plant utilisation (PU) of 99% as compared to 96% posted in 4Q16 as there was no maintenance turnaround in 1Q17, coupled with (ii) 9%-11% rise in USD-priced ASP as oil price improved further. Meanwhile, effective tax rate remained low at 16% vs. 12% previously benefiting from Global Incentive for Trading (GIFT). Segmental-wise, Olefins & Derivatives (O&D) recorded 3rd straight quarters of 100% PU while PU at Fertilisers & Methanol (F&M) improved to 96% from 89% previously given the statutory turnaround in Oct-Nov last year.

Still reasons for yearly comparison. As PU improved to 99% from 92%, weakening in MYR against USD and 17%-19% hike in ASP as oil price rebounded, 1Q17 net profit soared 119% YoY to RM1.30b from RM592m last year with revenue surging 49%. All these contributed to higher EBITDA margin of 41% in 1Q17 from 36% previously. Meanwhile, PU for O&D improved to 100% from 97% previously while F&M segment registered higher PU of 96% from 89% in 1Q16.

PU to come down with weaker price outlook. After three quarters of near perfect PU, it is expected to come off as turnaround activities are scheduled in the next three quarters. Management guided low- 90% in both 2Q17 and 4Q17 while PU in 3Q17 is set to decline to between low-80% and mid-80%. For SAMUR, management expects the new 1.2m mtpa facility to have PU of 70%-75% in FY17 and 80% in FY18. All in, management still guides the same PU of high-80% in FY17 before improving to low-90% in FY18. On the other hand, price outlook for O&D set to be softer given the supply recovery and the slow-moving demand while mixed outlook for F&M as market correction takes place.

Upgrade to OUTPERFORM. Post results, we revised FY17/FY18 estimate upward by 7%/3% as we (i) lowered effective tax rate to 20% from 25%, and (ii) fine-tuned profit margin from the strong 1Q17. However, we maintain our FY17/FY18 PU assumptions of 86%/90%. Meanwhile, we upgrade PCHEM to OUTPERFORM from MARKET PERFORM as the recent weakness in share price, which declined 7% in the past one month, presents a buying opportunity. New price target is raised to RM8.09/share from RM7.65/share as we rolled over valuation base-year to CY18 from CY17 with 3-year moving average of 16.5x PER from 17.7x previously. Risks to our upgrading call include weaker than expected PU rate and as well as petrochemicals prices.

Source: Kenanga Research - 16 May 2017