Petronas Chemicals Group - Discontinuing its Vinyl business

News  Petronas Chemicals Group Bhd (PCHEM) announced that it is discontinuing its vinyl business effective 01 Jan 2013.

Currently, PCHEM’s vinyl business manufactures and sells two key products namely vinyl chloride monomer (VCM) and polyvinyl chloride (PVC). Three plants will be affected, namely the VCM (capacity: 400k/mtpa) and PVC (180k/mtpa) plants in Kertih Integrated Petrochemical Complex and a PVC (100k/mtpa) plant in Vung Tau, Vietnam.

It will initiate a divestment process for the sale of its 93.1% interest in the Vietnamese PVC plant while the Malaysian plants will commence their decommissioning activities after 1 Jan 2013, with the process likely taking 2-3 years to complete.

PCHEM’s rationale of discontinuing the business is that the vinyl business performance is not satisfactory as compared its other segments, in addition to it not being closely integrated within PCHEM’s product value chain. 

Comments  This exercise is expected to impact PCHEM’s earnings negatively in the near term but the outcome should be positive in the longer run as the group could focus on its other high margin products that are more closely integrated within its product value chain.

PCHEM is expected to record a charge of c.RM560m in 4Q12 relating to decommissioning, contract termination and impairment expenses. 

This will reduce our FY13-14E reported earnings by c.6% as the business volume will fall by 5%. 

Outlook  Petrochemicals prices are on the rise due to seasonal factors in the current 2H, especially for O&D on restocking activities, which should help support PChem’s 2H12 earnings.

Changes To Forecasts

No changes to FY12E core earnings as we are not factoring in the non-core RM560m one-off charge.

FY13-14E earnings estimates have been cut by c.6% as we removed all the VCM capacity while accounting for a c. 26% fall in the PVC production capacity.

Since our FY13-14E dividend payouts are maintained at 50%, our  GDPS will fall by c.6% following the above, implying 5.0%-5.3% yields.

Rating  MAINTAIN OUTPERFORM

Valuation   Lower price target of RM6.99 (from RM7.46), post earnings revision and unchanged targeted CY13E PER of 14.5x. The targeted PER reflects the recent PER highs in Oct 2011, after normalising from Mar 2011 peak of 20x.   

Risks  A weaker USD vs. MYR rate and a sudden drop in crude oil prices.

Source: Kenanga