PCHEM reported its lowest quarterly net profit of RM340m in 4QFY19, no thanks to margin compression and forex losses. As a result, its share price immediately plunged by 9% yesterday or 20% YTD. We believe this negative news should have been factored by the fall. As such, we upgrade the stock to OP with revised TP of RM6.35. In addition, the stock also provides decent yield of 3%-4%

Dismal 4QFY19 results. 4QFY19 net profit which fell 39% sequentially to RM340m, the lowest quarterly earnings since listing in end-2010, brought FY19 net income to RM2.82b which came 13%/11% below house/street estimates. The disappointing results were attributable to compressed margin as well as a forex loss on shareholder loans pursuant to the divestment of 50% equity interest in a subsidiary. It declared 2nd interim NDPS of 7.0 sen (ex-date: 12 Mar; payment date: 27 Mar) in 4QFY19, totalling full-year FY19 NDPS to 18.0 sen (51% payout) which is lower than the 32.0 sen (53% payout) paid in FY18 and our FY19 estimate of 21.7 sen (50% payout).

Results hit by margin compression and forex loss… Despite revenue rising 15% QoQ to RM4.23b as plant utilisation (PU) rebounded to 89% in 4QFY19 from 81% in the preceding quarter, net profit contracted 39% to RM340m from RM553m previously which was due to abovementioned margin compression coupled with forex loss. Segmentally, Olefins & Derivatives saw EBITDA falling 28% to RM301m while Fertilisers & Methanol’s EBITDA fell 13% over the quarter.

… as ASP headed southbound. YoY, 4QFY19 net profit plummeted 66% to RM340m from RM1.01b, as revenue fell 16% from RM5.06b owing to lower average product prices and production volume as PU dropped to 89% from 94% and on the strengthening of MYR against USD, coupled with the abovementioned forex loss. YTD, FY19 net profit declined 41% to RM2.82b from RM4.79b in FY18 as revenue fell 16% to RM16.40b from RM19.58b. The weaker FY19 results were attributable to the same reasons as mentioned above and was mitigated by the weakening of greenback against MYR.

Earnings to recover in coming quarters with ASP expected to stay firmer in 1QFY20 given the supply limitation following planned regional plant turnarounds supported by stable demand. The weakening of MYR is also benefiting PCHEM for its USD-denominated revenue. Going forth, PU and ASP remain the two main earnings determining factor. Post-4QFY19 results, we cut FY20 estimates by 16% as we fine-tune ASP assumption while we introduce new FY21 numbers with earnings expected to rise by 14%.

Oversold; upgrade to OUTPERFORM. Yesterday, its share price fell sharply by 9% following the release of the dismal results, chalking up loss of 24% YTD. We believe the negativity should have been reflected in the price. Hence, we upgrade the stock to OUTPERFORM with a revised target price of RM6.35, which is based on 0.5SD below 3-year mean at 15.2x FY20 PER, from RM7.70 previously. Risk to our upgrade includes low petrochemical prices, which could lead to a lower spread hitting bottom-line.

Source: Kenanga Research - 27 Feb 2020