Titan Chemicals Corporation Bhd
(July 15, RM1.85)
Maintain hold at RM1.85 with target price of RM1.88: 1H10 reported net profit of RM177.9 million achieved 33.1% of our net profit forecast (RM538.2 million) and 33.6% of consensus estimates (RM529.3 million). We suspect this is due to lower polymer-naphtha margins since 1QFY10 that has resulted in a margin squeeze in earnings. Inventory writedowns of RM36.8 million also led to the lower 1H10 earnings. Excluding the writedown 1H10 net profit is RM214.7 million (39.9% of full year estimates and 40.6% consensus).
Quarter-on-quarter (q-o-q) reported net profit (RM72.2 million) was sequentially down 31.7%, mainly due to the RM29.6 million inventory write-down mentioned above. Barring it, Titan would have reported net earnings of RM101.8 million and a minimal sequential drop of 9.9% instead.
Year-on-year (y-o-y), net profit was down 58.5% (2Q09: RM174 million), as the general increase in price of naphtha versus the polymer products led to a squeeze in gross and profit before tax margins. Again, excluding the writedown, Titan’s bottom line fell 40.3%.
Demand for polymer products is expected to hold going forth, however margins will come under pressure as additional capacity from the new manufacturing plants in the Middle East and China will be operational. We are inclined to pare down our net estimates based on this outlook, however we will only do so pending their upcoming analyst briefing.
Market talk has it that the corporate proposal to be announced later last Friday maybe a general offer post a stake divestment by Titan’s major shareholders — the Chao Group and PNB. In our earlier report (Company Update: Up for sale? dated June 17) we had opined that a buy-out is not surprising given that Titan is priced attractively against international peers despite its world class production facilities. At present its FY10F PER is 6.2 times, P/BV is 0.7 times and EV/Ebitda is 4.3 times. Comparatively, the international peers are at FY10F PER of 11.1 times, P/BV of 1.7 times and EV/Ebitda of 9.6 times.
Maintain hold call and target price of RM1.88 at this juncture, pending further information from management post the corporate proposal announcement and their analyst briefing expected by the month’s end. — Kenanga Investment Bank Bhd Research, July 16
This article appeared in The Edge Financial Daily, July 19, 2010.
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