Although PCHEM posted another sequential weaker quarter in 3Q17, which is not unexpected, the record-high 9M17 results beat our expectation on stronger-than-expected plant utilisation as well as lower taxation charges under the GIFT scheme. Going forth, with only one turnaround activity in 4Q17 compared to two previously and coupled with seasonal strong petrochemical prices, upcoming results are likely to be stronger. It maintains as OUTPERFORM with a revised price target of RM8.10/share.

3Q17 above. At 86% of house/street’s FY17 estimates, 9M17 net profit of RM3.17b came above expectation as (i) 3Q17 earnings were stronger-than-expected on higher plant utilisation (PU) as 9M17 PU of 91% was higher than our FY17 assumption of 86%, and (ii) lower effective tax rate of 14% vs. our FY17 assumption of 20% due to lower tax rate under the Global Incentive for Trading (GIFT) for ethylene sold through Labuan. No dividend was declared in 3Q17 as expected.

Higher maintenance activities dragged QoQ results. Despite weaker USD against MYR and lower PU, 3Q17 revenue managed to inch up by 1% QoQ to RM4.01b, thanks largely to a 4% increment in ASP. The lower PU of 86% from 90% was the result of statutory turnaround and major maintenance at Kerteh facilities. As such, production volume was reduced by 2% to 2,466k MT from 2,514k MT in 2Q17. This dragged 3Q17 net profit by 5% to RM913m. Meanwhile, effective tax rate remained low at 14% from 12% previously, thanks to the GIFT mentioned above. Segmental-wise, Olefins & Derivatives posted lower PU of 86% from 91% due to statutory turnaround activities at derivatives plant while PU at Fertilisers & Methanol was maintained at 88% due to maintenance activities in the ammonia plant.

Better YoY earnings on volume, ASP and forex. 3Q17 earnings which rose 2% from RM891m was largely due to better ASP, stronger USD and higher production volume as SAMUR kick-started in May this year. However, higher maintenance activities which led to lower PU of 86% from 100% previously compressed its EBITDA margin to 36% from 41% previously. Nonetheless, YTD 9M17 earnings surged strongly by 45% to RM3.17b on the back of 28% hike in revenue, despite PU falling to 91% from 96%. The significant improvement in earnings was primarily due to the start of SAMUR in May coupled with higher USDdenominated ASP and the strengthening of greenback against MYR.

One turnaround in 4Q17 with better price outlook. So far, management guided for a seasonally strong ASP for all products in 4Q17 on demand-supply dynamic partly due to the winter season while crude oil prices are also on a recovery trend. Meanwhile, one more turnaround activity is scheduled in 4Q17 from two in 3Q17, while the upcoming PU is likely to be stabilised. On the other hand, as it will get other product to sell through Labuan as well, future effective tax rate will be around mid to high-teens as PCHEM will continue to benefit from GIFT, which only imposed tax at 3%.

OUTPERFORM maintained. Post-results, we revised our effective tax rate and PU assumptions for FY17/FY18 to 15%/20% and 90%/92% from 20%/20% and 86%/89%, previously, thus we raised FY17 and FY18 earnings estimates by 7% and 3%, respectively. Hence, our new price target is upgraded to RM8.10/share from RM7.85/share, based on unchanged targeted CY18 PER of 16x, which is in line with 3-year moving average. Maintain OUTPERFORM. 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 - 10 Nov 2017