PCHEM posted a sequentially weaker quarter in 2Q17, which is not unexpected, given the scheduled turnaround maintenance activities which are expected to continue in 2H17. Having said that, business volumes are set to grow higher with the commencement of SAMUR in May. As such, FY17 is still set to be a record year. We retain OUTPERFORM rating on the stock with a revised target price of RM7.85/share.

2Q17 within expectations. At 61%/63% of house/street’s FY17 estimates, 1H17 net profit of RM2.26b came within expectations as 2H17 is anticipated to be weaker as plant utilisation (PU) are expected to be at low-90% owing to three scheduled turnaround activities taking place in the next six months as compared to only one turnaround in 1H17. It declared 1st interim NDPS of 12.0 sen in 2Q17 (ex-date: 25 Aug; payment date: 08 Sep) vs. 7.0 sen paid in 2Q16.

Weaker ASP and utilisation QoQ as expected. 2Q17 net profit fell 26% QoQ to RM964m from the record high of RM1.30b which was not unexpected given the higher maintenance turnaround activities as well as lower ASP, which declined 17% on the back of weaker crude oil prices. Due to the turnaround activities, PU lowered to 90% from 99%. However, production volume remained comparable at 2,514k MT from 2,513k MT due to additional volumes from SAMUR. Effective tax rate remained low at 12% vs. 16%, benefiting from Global Incentive for Trading. (GIFT) Segmental-wise, Olefins & Derivatives (O&D) posted lower PU of 91% from 100% due to statutory turnaround activities at MTBE plant while PU at Fertilisers & Methanol (F&M) also dropped to 88% from 96% previously given the higher level of maintenance activities.

Higher YoY earnings on volume, ASP and forex. Compared to last year, 2Q17 and 1H17 earnings leapt 37% and 74%, respectively, to RM964m and RM2.26b on the back of 24% and 36% hike in revenues largely attributable to higher volume, ASP and the weakening of MYR against USD. Although PU fell to 90% in 2Q17 from 95% due to the abovementioned turnaround activities and maintained at 94% in 1H17, volumes were higher by 12% and 14%, respectively, as SAMUR kickstarted in May this year. On the other hand, effective tax rates were much lower at 12% and 14% in 2Q17 and 1H17 as opposed to 32% and 28% last year as it enjoyed the benefit of GIFT this year.

PU to come down with challenging price outlook in 2H17. With two turnaround activities scheduled in 3Q17 and one in 4Q17, PU in 2H17 is likely to be lower than 1H17 while FY18 is also expected to be another heavy turnaround maintenance year before two years of light maintenance in 2019 and 2020. Meanwhile, with high volatility of crude oil prices, petrochemical price’s outlook remains challenging. Prices for O&D is set to be firmer in 3Q17, but price outlook for F&M is expected to be bearish in the near term due to lower demand but oversupply situation.

OUTPERFORM maintained. While retaining our estimates, we lowered target price to RM7.85/share from RM8.09/share as our targeted CY18 PER for 3-year moving average is reduced to 16x from 16.5x previously. Although 2H17 earnings are expected to be weaker, we still see upside on the stock given its undemanding valuations. Thus, we maintain our OUTPERFORM rating. The stock also offers a decent yield of >3%. Risks to our call include weaker-than-expected PU rate and petrochemicals prices.

Source: Kenanga Research - 11 Aug 2017