The weak 1QFY20 results which was slightly higher than its record low, was anticipated given the collapse of oil prices. However, product prices have likely bottomed in Apr and likely to lead earnings recovery in 2H. However, we believe this has been reflected in its strong share price performance recently. Thus, we keep our MP rating with a revised TP of RM5.75.

Weak 1QFY20 as expected. At 19%/15% of house/street’s full-year FY20 estimates, we consider 1QFY20 core profit of RM352m to be within our expectation with earnings expected to recover in 2HFY20 as demand picks up. The 1QFY20 core profit was adjusted for forex gain on revaluation of shareholders’ loan to a joint operation company amounting to c.RM177m, from headline net profit of RM506m. No dividend was declared during the quarter as it usually pays half-yearly dividend.

Results hit by oil rout… 1QFY20 core profit rose slightly by 1% to RM352m from RM348m despite revenue falling 8% to RM3.89b from RM4.23b in 4QFY19. The slight earnings improvement was attributable to higher operational efficiency on higher production volume as plant utilisation (PU) improved to 94% from 89% as well as lower opex relating to maintenance activities. As such, EBITDA improved to 20% from 18%. However, lower sales volume and ASP caused the 8% contraction in revenue.

... which led to ASP decline. YoY, 1QFY20 core profit plunged 55% from RM783m while revenue dipped 6% from RM4.13b, owing to lower average product prices despite MYR weakening to 4.1795 per USD on average from 4.0905 previously while PU fell slightly from 95% in 1QFY19. Segmental-wise, EBITDA of Olefins & Derivatives (O&D) plummeted sharply by 74% to RM188m as ASP fell 14% as well as on net share of losses from associates while Fertilisers & Methanol (F&M) earnings inched up slightly by 1% or RM5m on lower opex.

ASP have likely bottomed out. Earnings should improve in 2HFY20 as product prices are expected to recover. Management believe that ASP has bottomed in April with recovery seen in May. It has guided for all product prices to stay firmer in 2QFY20 except ammonia which supply has been restored with plant already restarted but there is lack of demand from the downstream market. PU and ASP remain the two main earnings determining factor. We keep our FY20-FY21 estimates for now, post-1QFY20 results.

Keep MARKET PERFORM. With earnings uncertainty in this depressed market condition albeit with ASP already bottomed out, we decided to use P/BV to value PCHEM, at -2SD to 5-year average of 1.54x. As such, we raise our target price to RM5.75 from RM4.50 (- 0.5SD to 3-year average PER of 14.0x). Having said that, the recent strong price performance should have reflected the expectation of ASP recovery in the coming months. Thus, we maintain our MARKET PERFORM rating on the stock. Main risk to our recommendation is prolonged low petrochemical prices, which could lead to lower spreads hitting its bottom-line.

Source: Kenanga Research - 21 May 2020