This article first appeared in The Edge Financial Daily on October 16, 2018
Chemical Company of Malaysia Bhd
(Oct 15, RM1.96)
Maintain buy with a target price (TP) of RM3.08: Caustic soda prices continue to recover since July’s low of US$391 per tonne with the current prices hovering about US$480 (RM1,996.80) to US$466 per tonne (+23% to 19%). Management expects supply will tighten as we enter October and the wintering season begins in China on the back of a production “moderation” in line with China’s environmental agenda.
Severe weather in the Gulf of Mexico and Japan has a positive correlation with caustic soda prices in Southeast Asia by virtue of production disruption in the gulf will see volumes in Asia shifted to the US and, likewise, a typhoon in North Asia will disrupt production.
Capacity expansion remains on schedule with the Bangi polymers plant to see an additional capacity of 10% to 15% in the fourth quarter of 2018 (4Q18). We understand the Pasir Gudang Works 1 reactivation is about 30% completed and scheduled demolitions will be next. They will receive the equipment in 1Q19 and commission in 2Q19.
Chemical Company of Malaysia Bhd (CCM) was recently invited to bid for the supply of a small volume of caustic soda for a preliminary test run at the refinery and petrochemical integrated development (Rapid) (about 5,000 tonnes). Management expects the formal “invitation to bid” to be delivered soon This is in view of Rapid commencing operations by the first half of 2019 (1H19). It is positive on the chances of winning the contract to supply a portion of the volumes by virtue of its plants’ proximity (in Pasir Gudang, Johor) to Rapid.
We expect the velocity of revenues and earnings to mirror the trajectory of caustic soda prices (beginning in May 2018) for 3Q on the back of a lower caustic and chlorine average selling price. To note, 3Q17 caustic prices averaged at US$518 per tonne versus 3Q18 at US$437 per tonne. Thus we are inclined to remain on the side of caution; 1H18 core profit after tax and minority interest already made up more than 60% of our full-year forecast (1H18: RM21.2 million to FY18 estimate: RM29.7 million).
Our TP is a function of financial year 2019 (FY19) earnings per share of 23.7 sen pegged at a price-earnings (P/E) multiple of 13 times, in line with the Malaysian chemicals sector FY19 average. The stock is in deep value, currently trading at an attractive FY18 to FY20 P/E ratio of 10.4 times, 7.8 times and 7.2 times with an implied dividend yield of 4.8%, 6.4% and 7%. — Hong Leong Investment Bank Research, Oct 15.