PETALING JAYA: Chemical Company of Malaysia Bhd (CCM) is expected to reap the rewards of its capacity expansion investments this year, as well as the benefits of its degearing and demerger exercises.
RHB Research Institute said in a recent report that CCM is poised to be a proxy for the Pengerang project and the glove sector.
“The start-up of the Refinery and Petrochemical Integrated Development (Rapid project in Pengerang) is expected to increase caustic soda demand. The expected additional demand for caustic soda from the ramp-up of Rapid is circa 60,000 tonnes in 2019 and 156,000 tonnes from 2021 onwards.
“With a plant situated in close proximity to Pasir Gudang within a duopoly chlor–alkali market, CCM stands to benefit from Rapid’s commissioning. Polymer coating demand is also expected to continue its growth.”
This, the research house said, is based on the long-term growth prospects of the rubber glove manufacturers, with planned capacity expansions of around 50 billion pieces from the existing 200 billion pieces by 2020.
It also said CCM’s 2019 to 2020 financial years would continue to yield results after its degearing and demerger exercises in 2018.
“The expected growth will mainly be fuelled by a RM13mil to RM14mil per annum interest savings exercise and improvements in margins, given better operating efficiencies post last year’s corporate exercises.
“Additionally, extra contributions from capacity expansions, supply shortages and being a potential beneficiary from the ramp-up in Pengerang are among other catalysts. The investment case is further supported by potential implied yields of 6.1% to 6.6%.”
CCM manufactures and trades specialty chemical products with market shares of 26% in caustic soda and 36% in chlorine.
RHB Research also noted that CCM has embarked on a capacity expansion plan to grow its chemicals and polymer capacities by 50% and 15%, respectively, to capture the market’s growth pockets and supply deficits.
“By reactivating the Pasir Gudang Works 1 facility, it can boost the chlor-alkali production capacity by 20,000 electro-chloro units (ECU) to 60,000 ECU. Additionally, the expansion of CCM’s Shah Alam calcium nitrate plant to 24,000 tonnes per annum is set to come on stream by the second quarter of 2019.
“For the polymer business, by relocating the warehouse and corporate office to a new plant, the existing plant capacity in Bangi is expected to be boosted by 10% to 12% from the current 18,000 tonnes per annum. CCM’s 2019 total capital expenditure could be in the region of RM60mil to RM70mil.”
Separately, the research house said CCM is currently trading at a 2019 to 2020 price-to-earnings (P/E) ratio of 8.9 times to 7.2 times, which is a discount of 30% to 45% to its peers.
RHB Research said it deems this to be “unjustified.”
“We believe its manufacturing capabilities in chlor-alkali, coagulant and calcium nitrate, and commanding market position in chlorine, caustic soda, and polymer coatings should see it trade at least (if not higher) at a P/E that is on par with its peers, who are predominantly chemical traders in nature.”
Additionally, the research house said key risks to CCM this year could include factors such as weaker demand from its polymer and chemical businesses, as well as softening caustic soda prices.
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