Petronas Chemicals - Positive rationalisation of vinyl business Buy

- We maintain our BUY call on Petronas Chemicals Group (PChem), with an unchanged fair value of RM8.20/share, pegged to a FY13F EV/EBITDA of 8x – at a 20% premium to Thailand’s PTT Global Chemicals’ 6.7x.

- We have cut FY12F net profit by 10% due to the estimated RM560mil one-off provision to discontinue the group’s vinyl business, in largely decommissioning, site remediation, contract termination and impairment charges. But core net profit is largely unchanged. Similarly, we maintain our fair value, which is pegged to PChem’s earnings next year.

- PChem’s board has approved a plan to discontinue its vinyl business, which comprises 3 plants manufacturing vinyl chloride monomer (VCM) and polyvinyl chloride (PVC) in Kertih Integrated Petrochemical Complex in Malaysia and Vung Tau in Vietnam.

- The Malaysian operations have an annual production capacity of 400,000 tonnes of VCM and 180,000 tonnes of PVC while the Vietnam factory has 100,000 tonne of PVC. We understand that the Malaysian operations suffered a loss of RM133mil from 1 April 2011-31 December 2011, and generated a small net profit of RM30mil in 1HFY12.

- We are positive on this development as the group’s ethylene feedstock and resources can be reallocated to higher margin products, such as more complex polymer chains and performance chemicals, which could provide a stronger earnings outlook next year. 

- PChem’s vinyl operations have not been able to optimise on the margins along the group’s integrated value chain because annually, most of the 320,000 tonnes of ethylene di-chloride feedstock is sourced externally while only 90,000 tonne of ethylene is supplied by PChem’s ethylene cracker. Hence, the vinyl division’s earnings were vulnerable to market cycles. 

- Ethylene prices have fallen by 5% MoM and 18% HoH, polyethylene has contracted by 3% MoM and 7% HoH,  while methanol fell 14% MoM and 13% HoH. But since the beginning of the year, polyethylene prices are still up 6%, and methanol up 3%. 

- Hence, we maintain product price increases of 3%-5% in FY12F-FY14F assumptions, on expectations of a stronger global economy next year, driven by QE3 and furtherpump priming measures to stabilise and underpin a turnaround in petrochemical prices.

- The stock currently trades at an attractive FY13F EV/EBITDA of 6x, which is 61% below Taiwan’s Formosa Petrochemicals’ 16x. 

Source: AmeSecurities