Despite volume falling 16% sequentially due to lower plant utilisation, 3Q18 earnings was solid, which beat estimates on higher-than-expected spread led by strong ASP and weak MYR. Going forth, 4Q18 volume should improve on lower maintenance activity but price outlook is mixed. In all, we believe all positives are already priced in. It remains a MARKET PEFORM with a revised target price of RM9.35, which is supported by decent yield of c.3%.

9M18 above expectations. At 86%/85% of house/street’s FY18 estimates, 9M18 net profit of RM3.74b beat expectations, as the main discrepancy between the actual result and our estimates was the stronger-than-expected spread on strong ASP as well as weakening of MYR, coupled with lower effective tax rate of 5% in 3Q18 vs. our assumption of 15% for FY18. There was no dividend declared in 3Q18 as expected as it usually pays half-yearly dividends.

3Q18 remained strong despite maintenance activities. Although revenue inched up 2% QoQ to RM4.83b, 3Q18 net profit fell 8% to RM1.26b from RM1.37b in 2Q18, mainly due to lower plant utilisation (PU) of 79% from 94% on four heavy turnaround activities vs. one activity in 2Q18 which reduced sales volume substantially by 16% to 2.25m MT from 2.69m MT. However, this was mitigated by the improved spread on the back of strong ASP coupled with the weakening of MYR against the greenback. On the other hand, effective tax rate was at a new low of 5% from 8% as it continued to benefit from Global Incentive for Trading (GIFT) under Labuan Financial Services and Securities Act 2010.

Strong ASP boosted yearly earnings. Despite strengthening of MYR and PU falling from 86% in 3Q17 on higher turnaround activities mentioned above, which led to 9% YoY decline in volume from 2.47m MT, revenue still jumped 20% in 3Q18 thanks largely to the strong ASP as crude oil price recovered. This resulted in net profit jumping 38% from RM913m in 3Q17. YTD, 9M18 net profit leapt 18% to RM3.74b from RM3.17b on the back of 15% hike in revenue. This was also due to the same reasons of strong ASP, coupled with higher volume of 3% but was negated by the strengthening of MYR against USD. PU for both 9M18 and 9M17 was comparable at 91%. Meanwhile, effective tax rate was lower at 10% from 14% last year.

Volume likely to improve in 4Q18 but mixed price outlook. With only one more statutory turnaround in 4Q18 for Bintulu Fertiliser, PU is expected to recover from 79% in 3Q18 to meet our assumption of 91% for FY18. As such, product volume is likely to improve in the coming quarter. However, management guided for a mixed price outlook where generally prices for Olefins & Derivatives are lacklustre while prices for Fertilisers and Methanol should be firmer. Post-3Q18 solid results, we raised FY18/FY19 estimates by 12%/7% on: (i) better spread from higher ASP, and (ii) lower effective tax rate further to 10% from 12% for FY18 but maintained FY19’s assumption at 15%.

Still in the price, MARKET PERFORM maintained. Although 3Q18 earnings were solid, overall 2H18 earnings are expected to be weaker than 1H18 given more turnaround activities. In addition, the recent plunge in crude oil prices may affect sentiment for PCHEM. We believe the strong price performance of +22% YTD should have already been priced in all positives. It remains as MARKET PERFORM with a higher target price of RM9.35 from RM9.00 based on +1 SD 3-year CY19 mean of 15.5x PER from 16.0x previously. Upside risk to our call includes a sudden surge in crude oil prices.

Source: Kenanga Research - 19 Nov 2018