1Q19 results were a big let-down which saw earnings contracting 38% QoQ. This was largely due to lower spread coupled with a decline in sales volume. Meanwhile, the weakening pace is not likely to abate, given the lacklustre price outlook in 2Q19. As such, PCHEM is likely to see selling pressure in the near term. In all, we cut TP to RM8.75 after a 13% downgrade in FY19 estimates. Fairly priced at the moment, our MP call is supported by 3% yield.

1Q19 results missed expectations. At 17%/18% of house/street’s FY19 estimates, 1Q19 core profit of RM802m came below expectations owing to lower spread coupled with weaker sales volume. No dividend was declared during the quarter as it usually pays half-yearly dividend.

Lower spread and sales volume hit bottom-line badly. 1Q19 core profit declined sharply by 38% sequentially to RM802m from RM1.29b in 4Q18, on the back of 18% contraction in revenue over the quarter to RM4.15b. The decline in earnings was primarily owing to lower spread, which was complicated by weaker ASP, while lower sales volumes bogged down earnings further. This brought EBITDA margin to 30% from 33%. In addition, it reported a share of loss of RM24m from associate from a profit of RM42m in 4Q18. As sales volumes were lower coupled with weaker ASP, this resulted in an 18% drop in revenue despite plant utilisation (PU) remaining stable at 95% from 94% previously. There were one maintenance and one statutory turnaround activities in 1Q19 as opposed to only one statutory turnaround activity previously.

The lowest core profit in more than two years. YoY, 1Q19 core profit fell 25% from RM1.06b while revenue declined 16% from RM4.95b in 1Q18, no thanks to the abovementioned lower spread and sales volume which fell 14% YoY. However, this was partially offset by the strengthening of greenback against MYR. The PU dropped from 100% in 1Q18, as the current quarter had one maintenance activity in methanol plant and one statutory turnaround in aromatic plant. In all, EBITDA margin fell sharply from 37% previously as the prefect 100% PU in 1Q18 was attributed to the superb margins. Meanwhile, effect tax rate remained low at 9% vs. 17% due to the benefit from Global Incentive for Trading (GIFT) under Labuan Financial Services and Securities Act 2010.

Price outlook for 2Q19 remains weak due to supply and demand dynamics with the exception of polymer and urea which are expected to see improving outlook due to shortage of supply. PU in 2Q19 is likely to be comparable to that of 1Q19 as the statutory turnaround of aromatic plant was completed in April while there was a planned shutdown at MTBE plant early this month. Meanwhile, the management is unable to disclose earning details pertaining to the 100% acquisition of specialty product firm Da Vinci. The EUR163m purchase price tag is within the range of 8-11x EBITDA for similar M&A activities in the past five years. This acquisition is expected to increase specialty portfolio contribution by c.2% with a potential to grow about 10% in 10 years’ time. Currently, specialty portfolio contributed 5-6% to the group at EBITDA level.

Still MARKET PERFORM. Post results, we cut FY19 estimates by 13% as we expect sales volume to remain low in 2Q19 before normalising in 2H19. We also trimmed FY20E earnings by 2% on the adjustment solely from the effect in FY19 with key assumptions keeping unchanged. Accordingly, NDPS is also reduced proportionally based on an unchanged dividend payout ratio of 50%. In view of near term earnings weakness, we reduced our valuation matrix to 3-year mean of FY20 14.3x PER from +1SD 3-year mean of FY19 15.5x PER. This reduces our target price to RM8.75 from RM9.30 previously. Keep MARKET PERFORM for its decent yield of c.35%. Upside risk to our call includes a sudden surge in petrochemical prices, which could lead to a higher spread.

Source: Kenanga Research - 27 May 2019