PCHEM reported a weaker set of 3QFY19 results with net profit falling 51% QoQ, no thanks to turnaround activities, albeit meeting our forecast but missed consensus, which sent the stock price sharply lower by >5% yesterday. But, 4QFY19 should see earnings normalising given the completion of scheduled maintenance coupled with stabilising ASP. Thus, this should have reflected all near- term negatives. Keep MP call at RM7.70 TP.

3QFY19 results matched expectations. 3QFY19 net profit which plunged 51% to RM553m, totalling 9MFY19 net income to RM1.21b, met our forecast, making up 71% of our FY19 estimates. But the results came below consensus, accounting for 69% of market consensus’ FY19 forecast. The big fall in 3QFY19 earnings were largely expected given the three scheduled heavy turnaround activities (TA). There was no dividend declared during the quarter as it pays half- yearly dividend.

Higher TA hit bottom-line sequentially. 3QFY19 net profit dived 51% QoQ to RM553m from RM1.12b in the preceding quarter on the back of 15% decline in revenue. The fall in earnings was not unexpected given the three scheduled heavy TAs in 3QFY19 whereas there was none in 2QFY19. On a positive note, ASP improved slightly. Overall plant utilisation (PU) deteriorated to 81% from 100% with PU for Olefins & Derivatives (O&D) falling to 78% from 97% while Fertiliser & Methanol (F&M) saw its PU dropping to 83% from 107% previously. The extremely high PU of 107% in 2QFY19 for F&M was for inventory build- ups prior to the TAs in 3QFY19.

Lower ASP dampened YoY earnings. Despite PU improving from 79%, 3QFY19 net profit plummeted by 54% from RM1.21b a year ago as revenue contracted 24%, largely due to lower ASP which was partially offset by weakening of MYR against USD. Segmental-wise, PU for O&D fell from 96% to 78% on higher TA while F&M registered a higher PU of 83% from 69% thanks to better plant performance. YTD, 9MFY19 net income slumped 35% to RM2.48b from RM3.78b in 9MFY18 with revenue declining 16% as ASP fell as mentioned above. Meanwhile, overall group’s PU was higher at 93% from 91% with both O&D and F&M recording higher PU of 95% and 94% from 91% and 89% previously.

Earnings to recover in 4QFY19. With the completion of three TAs in 3QFY19 and no scheduled TA and maintenance activity in the coming quarter, coupled with stable ASP, earnings are expected to normalise in the coming 4QFY19. On the other hand, the initial earnings contributions from RAPID are likely to be minimal, which could be just at breakeven given start-up costs. Although the plant is already completed, PCHEM is still unable to start operations, pending the COD for the refinery as well as cracker plants, but it should be by this year- end. Management expects 60% PU in first year of operations and reaching full capacity in three years.

MARKET PERFORM retained. After reporting this weak set of 3QFY19 results during lunch break yesterday, PHEM saw its share price falling sharply by >5% from the day before. We believe the negativity should have been reflected in the price and with no sign of recovery for the depressed petrochemical prices, we keep our MARKET PERFORM rating at target price of RM7.70, which is based on 3-year mean FY20 PER of 15.5x. Our recommendation is also supported by a decent yield of 3%. For now, we keep our estimates but consensus may cut forecasts given over-optimistic estimates. Upside risk to our call includes a sudden surge in petrochemical prices, which could lead to a higher spread.

Source: Kenanga Research - 14 Nov 2019