CCM likely to see ramp-up in orders in FY20

TheEdge Wed, Apr 24, 2019 11:17am - 4 years View Original


Chemical Company of Malaysia Bhd
(April 23, RM2.10)
Maintain buy with an unchanged target price (TP) of RM3.08:
Chemical Company of Malaysia (CCM) announced that it had accepted the letter of award from Petroliam Nasional Bhd (Petronas) for the supply of caustic soda to Petronas Refinery and Petrochemical Corp Sdn Bhd.

 
The contract is based on Petronas’ required demand, estimated to be up to a maximum volume of 351,000 tonnes. Based on current market prices, pricing mechanism and other terms and conditions, the contract value is estimated to be at RM351.9 million for the primary period of three years from April 15, 2019 until April 14, 2022 with a one-year extension option.

We are positive on this announcement. Although an open secret, CCM’s clinching of the job highlights the resolve of their turnaround story and insatiable hunger to participate in one of the new economic engines of Malaysia that is the Refinery and Petrochemical Integrated Development (Rapid) in Pengerang, Johor.

In oil and gas refining, caustic soda is used in the extraction of sulphur, sulphur compounds and acids. We understand that demand from Rapid alone is about 150,000 to 160,000 tonnes per annum at full ramp-up — anticipated by 2021. This increase is expected to widen the domestic supply gap from 142,000 tonnes per annum currently to 300,000 tonnes per annum by 2021 without taking into account organic growth of existing industries.

We understand that Rapid’s demand for caustic soda is progressive and in tandem with the commissioning and ramp-up of its refineries. As such, we estimate that in financial year 2019 (FY19) the volumes required will be relatively small before a ramp-up in orders in FY20. It is understood that the pricing mechanism is referenced to the market plus a discount. CCM only has an about 80,000 tonnes per annum capacity at this juncture (from Pasir Gudang Work 2 or PGW2) before a further 40,000 tonnes per annum will be reactivated in the second half of this year via PGW1.

To cater for this contract, CCM has secured a back-to-back agreement with a commodity trading giant from North Asia to commit to the contracted supply.

While this news is positive, we opt for a conservative stance in our earnings forecasts. As it is, our projections have already made CCM a compelling turnaround story worthy of investing in.

Our TP is a function of FY19 forecast earnings per share of 23.7 sen pegged at a price-earnings multiple of 13 times. The stock is currently trading at an attractive FY19-FY20 price-earnings ratio of 8.6 times-7.9 times with an implied dividend yield of 5.8%-6.3%. CCM remains an underappreciated proxy for the glove sector and Rapid’s Integrated Petroleum Complex. Its turnaround and growth story remains intact. — Hong Leong Investment Bank Research, April 23

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