Petronas Chemicals - MARKET PERFORM - 7 Mar 2012

Petronas has teamed up with BASF to invest an additional RM4.0b in two separate facilities in Malaysia. This however has no immediate earnings impact to PCHEM given that the execution of the investment would be in 2015-2018.  We believe PCHEM will take charge of RAPID, although Petronas did not specific any details, given the business nature of the facility. Our PCHEM rating is maintained at MARKET PERFORM with an unchanged TP of RM7.02/share. 

RM4.0b investment. Yesterday, Petronas announced its has entered into agreements with BASF to expand their partnership in Malaysia involving RM4.0b worth of projects at their existing venture  in Kuantan and at the new site of the proposed Refinery and Petrochemical Integrated Development (RAPID) complex in Pengerang, Johor. These projects are to be implemented between 2015 and 2018. 

Forming a 40:60 JV for RAPID.  Under the Heads of Agreements, both parties have agreed to form a new entity (Petronas  40%; BASF 60%) to jointly own, develop, construct and operate production facilities for specialty chemicals and plants for precursor materials. This will become an integral part of the RAPID project. Although Petronas did not specifically mention that Petronas Chemicals Group Bhd (PCHEM) will be taking charge of this project, we believe that it is likely that  this project will be placed under PCHEM given the business nature of the facilities. 

To expand the current plant in Kuantan.  PCHEM’s 40% owned BASF Petronas Chemicals Sdn Bhd (BASF owns the remaining 60%) is planning to expand its C3 value chain with a new plant for superabsorbent polymers as well as to expand the production capacity of its existing glacial acrylic acid unit. Currently, this associate company operates an integrated complex with acrylic monomers, oxo products and butanediol production facilities at the Gebeng Industrial Zone. In the recent quarterly results, this unit reported disappointed earnings due to lacklustre demand and  lower prices. As a result, PCHEM’s 4Q11 associate income plunged 48% QoQ to RM54m from RM104m. 

No immediate earnings impact.  The two projects above will not have any near term material impact on PCHEM’s earnings as the projects will only be implemented 3-5 years from now. Besides, its RM4.5b Sabah Ammonia Urea (SAMUR) project, which had its groundbreaking last month, is expected to come on-stream only by 2015. Hence, the immediate earning drivers will only be petrochemicals prices and its plants’ utilisation. Give the strong petrochemicals prices YTD, 1Q12 is likely to be a strong quarter for PCHEM. 

Still a MARKET PERFORM. We have recently downgraded our rating on PCHEM given the strong rally in its share price (refer to our reported dated 28 Feb 2012) although we continue to like the company for its earnings quality, which is backed by its cost advantage. For now, we continue to rate the stock a MARKET PERFORM at an unchanged target price of RM7.02/share based on an unchanged 16.5x PER of CY12 earnings. 

Source: Kenanga