FY18 was a record year, which matched our expectations, on the back of higher sales volume and ASP with commendable plant utilisation staying above 90%-level. Going forth, new Rapid capacity set to kick-start in 2H19 will be the key earnings catalyst. However, soft price outlook in near term will continue to suppress sentiment. Thus, we keep our MP call at revised target price of RM9.30, which is supported by decent yield of c.3%.

FY18 results matched expectation. 4Q18 net profit of RM1.29b met our forecast, which brought FY18 net income 19% YoY higher to RM4.98b that came 2% above our forecast but beat market consensus slightly by 7%. It declared a final NDPS of 18.0 sen (ex-date: 08 Mar; payment date: 12 Mar) in 4Q18, which was higher than the 15.0 sen paid in 4Q17, totalling FY18 NDPS to 32.0 sen (dividend payout of 50%) vs. our forecast of 31.0 sen and 27.0 sen paid in FY17.

High utilisation led 4Q18 earnings offsetting lower ASP. 4Q18 net profit rose 2% QoQ to RM1.29b on the back of 5% hike in revenue, despite lower ASP as crude oil price declined, which was largely due to higher plant utilisation (PU) of 94% from 79% in 3Q18 on only one statutory turnaround activity as compared to four heavy turnaround activities previously. As such, sales volume soared 19% to 2.68m MT from 2.24m MT while revenue was also boosted by the weakening of MYR against USD. On the other hand, effective tax rate rose to 12% from 5% due to de-recognition of unutilised business losses and RA pursuant to Finance Act 2018. However, it continued to benefit from Global Incentive for Trading (GIFT) under Labuan Financial Services and Securities Act 2010.

Higher ASP and sales volume led yearly earnings. 4Q18 net profit jumped 28% YoY from RM1.01b in 4Q17 while revenue rose 7% over the year. This was primarily attributable to higher ASP as well as a 2% rise in sales volume to 2.68m MT from 2.64m MT in 4Q17. Overall PU improved slightly from 93% given the lower level of maintenance activities. Similarly, FY18 net profit leapt 19% to RM4.98b while revenue grew 12% due to higher ASP as well as sales volume, which rose 3% to 10.42m MT from 10.14m MT last year, largely attributable to new urea production from Petronas Chemicals Fertiliser Sabah (formerly SAMUR) which started in May 2017. Overall, PU remained commendable at 92% in FY18 from 91% in FY17.

Flattish volume likely in 1Q19 but price outlook challenging. Management guided a similar level of turnaround activities in 2019 with five turnaround activities as opposed to six activities in 2018. It also anticipated PU to maintain at >90% in 2019. Having said that, petrochemical prices are expected to soften in 1Q19 on supply and demand dynamics. Going forth, the new capacity from Rapid will lead its expansion story with the projects currently at 96% mechanical completion and on track to commence production in 2H19 and full operation by October. Post-4Q18 results, we trimmed FY19 estimates by 0.4% on: (i) lower ASP as crude oil price weakened, (ii) effective tax rate of 12% from 15% as it remained low throughout FY18, and (iii) adjustment for FY18A. We also introduced new FY20 forecasts in which we expect earnings to grow 4.2% on an improved margin spread while other key assumptions are similar to that of FY19.

In the price, MARKET PERFORM retained, as near-term price outlook remains volatile given the oil price volatility. The new Rapid capacity is likely to be less impactful to FY19 earnings given start-up costs and we did not include this new capacity in our model as we await official commencement of production. It remains a MARKET PERFORM with a lower target price slightly to RM9.30 from RM9.35, based on unchanged +1SD 3-year CY19 mean of 15.5x PER. Upside risk to our call includes a sudden surge in crude oil prices.

Source: Kenanga Research - 26 Feb 2019