PCHEM posted an impressive set of FY17 results which is not unexpected given the recovery of crude oil prices in the past year as well as the new SAMUR which started last May. Meanwhile, although near-term ASP remains upbeat, any uptick in crude oil prices remains challenging for 2018. Thus, with share price already rallied 10% in the past three month, we believe all positives have priced in, hence we cut the stock to MP with higher target price of RM8.40.

FY17 in line. PCHEM reported its RM1.0b quarterly revenue in 4Q17 which is within our estimate but beating consensus slightly, totalling FY17 to RM4.18b which came 5%/6% above house/street’s estimates. It declared 2nd interim NDPS of 15.0 sen (ex-date: 05 Mar; payment date: 21 Mar) which is also higher than 12.0 sen paid in 4Q16. This brings FY17 NDPS to 27.0 sen, higher than our estimates of 24.8 sen and 19.0 sen paid in FY16.

Higher plant utilisation led sequential earnings growth. A higher plant utilisation (PU) of 93% was achieved from 83% previously, which led to higher sales volume by 7% QoQ which boosted 4Q17 net profit to a new record high of RM1.01b which was 10% higher than RM913m in 3Q17. Besides higher sales volume, stronger ASP also helped to drive earnings higher despite a weaker USD against MYR. Meanwhile, effective tax rate remained low at 21% from 14% previously due to the Global Incentive for Trading (GIFT) for ethylene sold through Labuan. The higher tax rate in 4Q17 against 3Q17 was due to the recognition of deferred tax liabilities at SAMUR. Segmental-wise, Olefins & Derivatives (O&D) posted PU which rebounded to 98% from 86% as there were statutory turnaround activities at its derivatives plant in 3Q17 while PU at Fertilisers & Methanol (F&M) improved slight to 90% from 88% previously.

Better year on new SAMUR plant and higher ASP. Despite lower PU on statutory turnaround activities in 2017, new capacity from SAMUR which started in May 2017 coupled with higher ASP on the recovery of crude oil prices, PCHEM reported improved results which saw 4Q17 earnings inching up 2% to RM1.01b from RM987m in 4Q16 while FY17 surged 32% to record high of RM4.18b from RM3.17b. With the group’s PU of 91% in FY17 from 96%, its EBITDA margin managed to maintain at 38% which is fairly impressive, partly due to operational efficiency. Overall, PU at O&D fell to 94% in FY17 from 100% due to statutory turnaround activities while F&M’s PU declined to 90% from 93% in FY16, due to higher statutory turnaround activities.

PU to sustain at 90%; near-term price outlook remain good. As statutory turnaround activities are expected to be similar as FY17, PU in FY18 is seen sustaining at the 90% level. Meanwhile, O&D prices are expected to remain on an uptrend on limited supply due to regional turnarounds. For F&M, fertiliser prices are expected to be firmer on limited supply in the Middle East while methanol prices are set to strengthen on healthy downstream demand and tight supply in China. Post-4Q17, we raised FY18E earnings by 4% solely on lower tax rate of 16% from 20% where management guided for between 13%-16%, as it will continue to benefit from GIFT. We also introduced FY19 forecasts where we expect earnings to grow marginally by 0.2% on higher depreciation charges for RAPID projects.

Cut to MP as price already rallied ahead of valuations. Despite this commendable set of results, we downgrade the stock to MARKET PERFORM from OUTPERFORM as the share price had rallied c.10% in the past three months on the back of seasonally strong petrochemicals prices in 4Q. With an unchanged CY18 PER of 16x, based on 3-year moving average, its target price is raised to RM8.40 from RM8.10 previously. Risk to our downgraded call includes a sudden surge in crude oil prices.

Source: Kenanga Research - 21 Feb 2018