Sector: Industrial Products
GICS: Materials/Diversified Chemicals
Market Value - Total: MYR1,119.2 mln
Summary: Chemical Company of Malaysia (CCM) is the largest manufacturer of compound fertilizers and generic drugs in Malaysia, and a leading producer of industrial and specialty chemicals.
Analyst: Siti Rudziah Salikin
recommendation: hold TP RM3.10
price RM2.78
Date: July 8, 2008
Highlights
The expansion of its fertilizer capacity will make CCM the largest compound fertilizer manufacturer in the region. The fertilizer division is well-positioned to capitalize on the high prices of agricultural commodities, which will drive the demand growth for fertilizer to boost crop output.
The growth prospect for the pharmaceutical segment is promising in our opinion, in view of rising healthcare spending and the expected rise in generic substitutes. As the largest manufacturer of generic drugs in the country, CCM is in a favorable position to benefit from the projected growth for the industry.
We also view positively CCM’s efforts to expand its water care solution to include physical water treatment technology to its present chemical treatment. This will help CCM to weather the current price competition from cheaper imports of industrial chemicals.
We forecast a two-year net profit CAGR of 19.5% for CCM driven by the expansion of the fertilizer division and the growth in the pharmaceutical segment.
Investment Risks
Risks to our recommendation and target price include a reversal in the commodity price uptrend which may reduce the demand for fertilizers. A continued increase in raw material prices and stronger competition from cheaper imports will also put a pressure on margins for the pharmaceuticals and chemicals divisions.
Recommendation
We initiate coverage on CCM with a Hold call and a 12-month target price of MYR3.10.
CCM offers indirect exposure to the buoyant agricultural commodity sector through its expanding fertilizer division and the growing pharmaceutical sector in the country. The stock also gives a decent dividend yield of 5.8%.
At 16x 2008 earnings, the stock trades at a premium to the market’s PER but we believe this is supported by our projected double-digit earnings growth. The valuation is also within the range of multiples of between 14x and 20x for the stock over the past two years.
We continue to value CCM at 16x PER and assign the multiple to our projected earnings for 2009 to arrive at our 12-month target price.
In its 2007 annual report, the company detailed its commitment to the framework on Corporate Social Responsibility. Its social contributions included pharmaceutical donations to the Johor flood victims in 2007 and personal first aid kit donations to Malaysian pilgrims on their Haj under the “Sahabat Korporat Tabung Haji’ programme. CCM also collaborated with Yayasan Jantung Malaysia and the National Diabetes Institute to promote greater public awareness on health issues.
Background
CCM is the largest manufacturer of compound fertilizers and generic drugs in Malaysia, and a leading producer of industrial and specialty chemicals. Listed on the Main Board of Bursa Malaysia in 1966, CCM was part of the UK-based ICI Group, prior to a management buyout in November 1994. Permodalan Nasional Berhad (PNB) became CCM’s controlling shareholder in January 2005. Currently, PNB has 13.7% direct stake in CCM and a 45.9% indirect stake via Skim Amanah Saham Bumiputera. Tan Sri Ab. Rahman bin Omar is the Chairman of CCM and Dato’ Dr. Mohamad Hashim bin Ahmad Tajudin is the Group Managing Director.
CCM’s businesses are divided into three main segments, namely: (i) fertilizers; (ii) chemicals; and (iii) pharmaceuticals. The fertilizers division was the largest revenue contributor in 2007, accounting for 48.2% of total revenue. In terms of profit contribution, the pharmaceuticals segment took the lead, accounting for 53.3% of group pre-tax profit for 2007 with the fertilizers division contributing 33.1%.
Fertilizers
CCM opened Malaysia’s first compound fertilizer plant in Shah Alam in 1967 and is today the largest producer of compound fertilizers in Malaysia with an estimated 30% market share. CCM’s fertilizers are sold under the Cock Head brand, which has an established presence in the region. CCM also trades a wide range of other straight and mixed fertilizers. Its customers generally represent those in the oil palm plantation and cash crops industries. About 60% of sales go to the domestic plantation companies and 30% to domestic small holders. The remaining 10% are exported to the countries in the region.
The expansion of oil palm plantations and the current high prices of agricultural commodities have boosted the demand for and tightened the supply of fertilizers in the country. CCM’s plant in Shah Alam is operating at full capacity of 280,000 tons per year. CCM is investing MYR150 mln in three new fertilizer plants, which will gradually expand its production capacity to 670,000 tons by 2010. The construction of the first plant in Bintulu, Sarawak is expected to start operations by July 2008. The other two plants will be located in Lahad Datu, Sabah and in Medan, Indonesia. The new plants will place CCM closer to its markets, thus reducing the delivery costs. In the meantime, CCM is importing fertilizers as well as contracting out some of the manufacturing to third parties to fulfil the current demand from its customers.
CCM is also converting its existing fertilizer plant in Shah Alam into a safer and lower cost urea-based steam granulation plant from the current ammonia-based NPK Compound Plant. With the conversion, which is expected to take place in 4Q08, CCM expects to reduce its plant maintenance and servicing costs. At the same time, the logistics and handling expenses relating to liquid ammonia, which is currently imported, will be eliminated. CCM plans to spend MYR25 mln for the conversion and will write off MYR15.4 mln in net book value of the fixed assets and spare parts of the current nitric acid plant.
Prices of the main raw materials, such as ammonium sulfate, nitrogen dioxide, potassium and phosphate, have been on the rise. However, due to the strong demand for fertilizers, CCM has been able to pass on the cost increases to its customers through price hikes (the price of compound fertilizers was raised by 15% in September 2007). CCM also indirectly owns a stake in its phosphate supplier, Phosphate Resources Ltd, which operates the largest phosphate mine in Australia. In September 2006, CCM acquired a 16% stake in Perth-based CI Resources Ltd, which holds 39.1% of Phosphate Resources. The strategic ownership helps to ensure an uninterrupted and cost-competitive supply of phosphates to CCM.
Chemicals CCM’s chemical division, which is grouped under CCM Chemical Sdn Bhd, produces various chemical products at its three manufacturing and repacking facilities: (i) chlor-alkali and coagulants plants in Pasir Gudang; (ii) calcium nitrate plant in Shah Alam; and (iii) ammonia bottling plant in Port Klang. It is also a major trading house of industrial and specialty chemicals, representing over 50 leading principals both domestically and in the region.
CCM Chemical is the leading supplier of water treatment solutions to the municipal and industrial waste water sectors in the country. Malaysia remains its main market but revenue contribution from exports or sales outside Malaysia have gradually grown to about 30% from 23% in 2005. CCM aims to increase export contribution to 40% of revenue in the next few years as it expands its regional networks from present Singapore, Indonesia, Vietnam, Thailand and the Philippines.
CCM acquired 97.1% of Enersave Water Sdn Bhd (Enersave) in April 2008 for MYR32.3 mln to strengthen its presence in the watercare business and expand its offering of watercare solution to include physical water treatment technology in the clean water and wastewater sectors. Enersave designs, installs and provides maintenance services for water purification and wastewater treatment systems primarily for the oil and gas, microelectonics and utilities sectors.
Pharmaceuticals
CCM, via its wholly-owned subsidiary CCM Pharmaceutical Sdn Bhd, is the largest manufacturer of generic drugs in Malaysia and is the leading player in the over-the-counter pharmaceutical market in Malaysia. CCM Pharmaceutical has over 280 products in its portfolio, including antihistamines, antibiotics and expectorants.
CCM expanded its pharmaceutical division further when its other whollyowned unit, CCM Pharma Sdn Bhd acquired the brands and assets of Malayan Pharmaceutical Sdn Bhd for MYR22 mln in March 2007. The move brought several and established brands under CCM’s wing and is expected to strengthen its leading position going forward. CCM has three manufacturing facilities located in Bangi, Petaling Jaya and Subang Jaya. The Bangi facility focuses on producing oral solid dosage products while the Petaling Jaya and Subang Jaya plants concentrate on complex products and cephalosporin, respectively. The facilities in Bangi were recently expanded (at a cost of MYR50 mln), which doubled its capacity to 1.0 bln tablets annually.
CCM also owns 73.7% of CCM Duopharma Biotech (Duopharma) (CCMD MK, MYR2.48, Not Ranked), which was acquired in October 2005. Duopharma is a leading manufacturer of small volume injectables (SVI), which is a premium pharmaceutical product, and has a growing herbal pharmaceutical business.
Duopharma’s manufacturing facility in Klang produces liquid for the treatment of haemodialysis, as well as tablets, capsules and ampoules for SVI. It plans to spend MYR75 mln to expand its manufacturing and warehousing facilities. Upon completion in 2009, it expects to double the plant’s manufacturing capacity to 1.5 bln tablets, capsules and ampoules for SVI and more than one mln liters of liquids for the treatment of haemodialysis. Duopharma derives over 90% of its revenue from domestic clients, which include the government, the over-the-counter market and private hospitals.
CCM’s pharmaceutical division exports its products to over 20 countries, with Singapore and Hong Kong being the two largest markets. CCM is looking to penetrate new markets, such as the Middle East and Africa to grow the export contributions to the pharmaceutical division’s revenue from less than 10%, presently.
Earnings Outlook
CCM’s recurring net profit grew 22% YoY in 2007 (2006 results included a gain of MYR62.7 mln from sale of investments while 2007 profit included a MYR12.3 mln gain from the revaluation of property and sale of land). Leading the growth was the fertilizers division, which saw a 35.1% YoY growth in revenue and an improvement in pre-tax margins to 4.8% from 2.4% in 2006. This was due to increased fertilizer prices arising from the tighter global supply/demand for fertilizers. Higher bulk trading of straight fertilizers in the ASEAN markets also contributed to the growth. The fertilizers division’s contribution to group pre-tax profit rose to 33.1% in 2007 from less than 10% in 2006.
Pre-tax profit for the pharmaceutical segment increased 12.6% YoY driven by the expansion of the over-the-counter pharmaceutical market (helped by the inclusion of Malayan Pharmaceutical’s products) and increased sales to the government sector. The chemical segment, on the other hand, recorded a 29.4% YoY drop in pre-tax profit despite registering 22.9% YoY rise in revenue due to the entry of cheaper imports, which eroded prices and squeezed profitability.
We forecast a two-year net profit CAGR of 19.5% to 2009 for CCM, driven by the expansion of the fertilizer division and the growth in the pharmaceutical segment.
The government’s focus on the agriculture sector under the Ninth Malaysian Plan as well as the expansion of oil palm plantations in Sabah, Sarawak and Indonesia augurs well for CCM’s fertilizers division. The high prices of agricultural commodities, which are expected to sustain in view of the tight supply/demand situations for almost all agricultural commodities, will also support the growth in demand for fertilizer to boost crop output. For CCM, 2008 will see the full-year impact of the price hike and maiden contribution from the fertilizer plant in Bintulu. The full-year impact of the capacity in Bintulu and the commencement of the plant in Medan will support the growth for 2009. We also expect greater plant efficiency after the conversion of the plant in Shah Alam in 4Q08 with the impact to be felt in 2009.
The Malaysian pharmaceutical industry is estimated to have expanded by 12% in 2007, with the generic market registering a 16% growth. Going forward, the generic market is expected to see a stronger growth given a large number of patents expiring worldwide. Given that locally manufactured pharmaceuticals account for an estimated 20%-30% of the market, there is good potential ahead for local players to increase their market share. As the largest over-the-counter player domestically and with the expansion of its manufacturing facilities, CCM is in a favorable position to benefit from the projected growth for the industry.
Nonetheless, we expect some pressure on operating margin for the pharmaceutical segment due to the increasing cost of regulatory compliance in the pharmaceutical segment and rising competition from imported generic products.
The demand outlook for the chemical division is relatively stable, in our opinion, given the constant need for a clean source of water supply. However, competition from cheap imports continues to be a concern and may continue to squeeze margins for the division. CCM is enhancing its competitiveness by increasing the specialty content of its chemical product portfolio via its recent acquisitions of Enersave.
Valuation
At 16x 2008 earnings, the stock trades at a premium to the market but we believe this is supported by its double-digit net profit growth. The valuation is also within the range of multiples of between 14x and 20x for the stock over the past two years.
We continue to value CCM at a 16x PER and assign the multiple to our projected earnings for 2009 and arrive at our 12-month target price for the stock of MYR3.10.
We expect CCM to be able to maintain a dividend payment of 16 sen per share in 2008, yielding a decent 5.8% at the current share price.
Recent Developments
April 2008: CCM completed the acquisition of 97.1% stake in Enersave Water Sdn Bhd for MYR38.28 mln.
April 2008: CCM entered into a conditional shares sale agreement to acquire 100% of Innovative Polymer Systems Sdn Bhd, 100% of Innovative Resins Sdn Bhd and 100% of Delta Polymers Systems Sdn Bhd for MYR126.9 mln cash from Paramount Discovery Sdn Bhd. The acquisition is in line with CCM’s business strategy of increasing the specialty content of its chemical product portfolio.
肥料领域的49%股权落入LTH手中，和大股东有协同作用吗？另一个问题是你只有51%，成长率都要减半。
CI RESOURCE的磷肥供应影响很小。
从akn买来的公司，是做手套方案的，有协同作用吗？
超过15倍本益比很贵，原因只是GLC，没有其他原因。
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