CCM rises 5.1% after HLIB Research starts coverage

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KUALA LUMPUR (Sept 21): Shares in Chemical Company of Malaysia Bhd (CCM) rose as much as 5.10% after Hong Leong IB Research (HLIB) initiated coverage on the stock with a “Buy” call and a target price (TP) of RM3.08, taking cues that CCM has a multitude of catalysts in its narrative which warrant further attention by investors.

CCM opened at RM2.00, which was four sen or 2.04% higher than its previous day closing price. At 10.30am, the counter rose 10 sen or 5.10% to RM2.06 with 1.93 million shares traded, giving it a market capitalisation of RM326.73 million.

Over the past 12-months, the stock has gained some 22.22%.

In a note released today, HLIB said this is fueled by the capacity expansion, de-leveraging exercise, direct exposure to the glove sector’s capacity expansion, Petronas’s refinery and petrochemical integrated development (RAPID) kicker and undemanding valuations.

“Being its de-gearing exercise which will reduce its interest expense by circa RM13 million to RM14 million per annum and capacity expansion program which is expected to drive earnings growth in the near term,” said its analyst Sheikh Abdullah.

Having undergone its restructuring and deleveraging program, earnings visibility has improved whilst earnings outlook is brighter than ever, he said.

For the uninitiated, CCM is a major producer of inorganic chemicals and polymers in Malaysia, with an estimated market share of 26% of caustic and 36% for chlorine and ranks top 3 in terms of suppliers of raw materials (polymers) to the glove sector.

“We feel that CCM is an underappreciated proxy to the robust glove sector which is already trading at above 35 times PE or 2 SD above the three-year historical mean,” he said.

On its earnings growth, HLIB said the forward earnings growth from CCM’s polymers segment will be driven by de-bottlenecking, which should see an increased capacity of 10% to 15% in 4Q18, whilst the chemicals segment should see 25% growth in FY19 on the back of capacity expansion from the reactivation of its chlor-alkali plant Pasir Gudang Works 1 (PGW1).

“The downside risk to our forecasted numbers pertain to average prices of caustic soda falling below US$500 MT per annum moving forward and capacity expansion from PGW1 falling behind schedule.

“The upside risk to the stock includes successful bidding for the supply of caustic soda to RAPID and higher caustic soda prices,” it said.

The research house opined that CCM is under-researched and under-owned amongst institutional investors. The stock is currently trading at an attractive FY18-20 PER of 11.0 times, 8.3 times and 7.6 times.

“We feel that this is justified given that the turnaround story is compelling, market structure is favourable and headwinds from RAPID and capacity expansion driven earnings are moist in the air,” it added.