While 1Q18 earnings were strong, with five turnaround activities in the next three quarters, earnings are expected to soften in the near term. Nonetheless, firmer petrochemical prices should still put PCHEM in investors’ radar. As such, we maintain our MARKET PERFORM rating with a revised target price of RM8.65, which is supported by a decent yield of c.3%.

1Q18 met expectations. Although 1Q18 net profit of RM1.11b made up 26%/27% of house/street’s FY18 estimates, we consider this to be within expectations given earnings expected to come off in the next two quarters with five scheduled turnaround activities in the next three quarters as opposed to 100% utilisation in 1Q18. No dividend was declared in 1Q18 as expected as it usually pays dividend half-yearly.

A good sequential result. A perfect 100% plant utilisation (PU), higher petrochemical prices and lower taxation led to a 10% sequential improvement in 1Q18 net profit to RM1.11b from RM1.00b in 4Q17 on the back of 4% hike in revenue to RM4.95b from RM4.74b previously. The earnings were basically led by Olefins & Derivatives (OD) with EBITDA jumping 15%. Meanwhile, 1Q18 PU was 100% from 93% previously while the rise in product prices was almost across all segments except for Urea for which prices stayed stable. Meanwhile, effective tax rate was reduced to 17% from 21%, benefiting from the Global Incentive for Trading (GIFT) for ethylene sold through Labuan. The higher tax rate in 4Q17 was due to the recognition of deferred tax liabilities at SAMUR.

Strong MYR hit bottom-line. While 1Q18 revenue rose 5% YoY to RM4.95b from RM4.70b which was largely due to higher selling prices and new capacity from SAMUR, which started in May 2017, net profit fell 15% from RM1.30b to RM1.11b owing to the strengthening of MYR against USD by about 12% or 52 sen and a one-off adjustment of RM120m relating to under accrual of manpower-related expenses in 1Q17. PU was 99% in 1Q17. Overall, OD posted weaker EBITDA by 17% on stronger MYR while Fertilisers & Methanol (FM) registered EBITDA growing 25% on the new SAMUR capacity.

PU to sustain at 90%; near-term price outlook remains good. With one statutory turnaround activity in 2Q18 and four others in 2H18, PU is expected to come off from the 100%-mark in 1Q18. Nonetheless, it is expected to sustain at the 90% level in FY18 which will help to sustain earnings growth as well. On the other hand, price outlook remains firmer for OD segment on supply-demand dynamic but FM products, especially Urea and Ammonia are likely to see softer prices given the high inventory in Thailand coupled with end of purchasing season in the West for the former while the latter will see new capacity in SEA with low demand from downstream due to turnaround activities.

Remain MARKET PERFORM. While we expect earnings to weaken in the coming quarters due to turnaround activities, interest on petrochemical companies like PCHEM, will remain strong given the recovery in oil prices. As such, we are now valuing the stock at +1 SD 3-year CY19 mean at 16.5x PER from 3-year CY18 moving average of 16x PER previously with unchanged FY18/FY19 estimates. Thus, new target price is now higher at RM8.65 (vs. RM8.40 previously). It remains MARKET PERFORM. Upside risk to our call includes a sudden surge in crude oil prices.

Source: Kenanga Research - 22 May 2018