KUALA LUMPUR (Aug 6): Hong Leong Investment Bank (HLIB) Research foresees stronger earnings for Chemical Company of Malaysia Bhd (CCM) for the second half of the financial year ending Dec 31, 2020 (2HFY20), particularly driven by improved sales volume of its caustic soda.

“We met up with management of CCM last week and we view that the global uptrend of glove demand would only be marginally positive for its polymer division as it is a very competitive market with a low barrier to entry. 

“Hence, CCM is a price-taker and has only experienced an about 3-4% increase in its ASP (average selling price) of polymers q-o-q (quarter-on-quarter) relative to glove manufacturers which have seen their ASPs increase by about 25-30%,” said HLIB Research analyst Low Jin Wu in a note today. 

Low noted that the research house expects the group's results for the second quarter ended June 30, 2020 (2QFY20) to come in below 1QFY20's due to a weaker ASP and lower sales volume as many of its clients decreased their orders due to the movement control order (MCO). 

“However, we expect CCM’s caustic soda demand to pick up in 2HFY20 due to recovery of economic activity in Malaysia post the MCO, while the caustic soda ASP is expected to remain weak for the remainder of the year as its price has a very high correlation with global GDP (gross domestic product) growth,” said Low. 

Furthermore, he believes that the outlook for CCM remains muted at this juncture despite better prospects for its chemicals/polymers supplied to glove companies. 

“23% of its revenue is currently attributed to gloves, and it is still more sensitive to the ASP and sales volume of its caustic soda division, whose outlook is subdued at this point in time due to a global economic slowdown from the coronavirus (Covid-19).

“We view that the improvement in revenue and profit from gloves would not be able to offset weaknesses coming from the caustic soda division,” he said. 

Low maintained his "hold" call for CMM at RM1.47, with an unchanged target price (TP) of RM1.38, based on 12 times FY20 earnings per share (EPS).

He believes that CCM is currently fairly valued and the outlook for its caustic soda division would need to improve to warrant a rerating of his call.

At the time of writing today, shares in CCM were up three sen or 2.04% at RM1.50, valuing the group at RM251.54 million.