Petronas Chemicals - MARKET PERFORM - 7 Mar 2012

Stock Name: PCHEM
Company Name: PETRONAS CHEMICALS GROUP BHD

Research House: KENANGA

Price Call: BUY

Target Price: 7.02

Petronashas teamed up with BASF to invest an additional RM4.0b in two separatefacilities in Malaysia. This however has no immediate earnings impact to PCHEMgiven 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 ofthe facility. Our PCHEM rating is maintained at MARKET PERFORM with anunchanged TP of RM7.02/share. 

RM4.0b investment. Yesterday, Petronas announced its has enteredinto agreements with BASF to expand their partnership in Malaysia involving RM4.0bworth of projects at their existing venture in Kuantan and at the new site of the proposed Refinery andPetrochemical Integrated Development (RAPID) complex in Pengerang, Johor. Theseprojects 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 newentity (Petronas  40%; BASF 60%) to jointlyown, develop, construct and operate production facilities for specialtychemicals and plants for precursor materials. This will become an integral partof the RAPID project. Although Petronas did not specifically mention thatPetronas Chemicals Group Bhd (PCHEM) will be taking charge of this project, webelieve that it is likely that  thisproject will be placed under PCHEM given the business nature of thefacilities. 

To expand the current plant in Kuantan. PCHEM's 40% owned BASF Petronas Chemicals Sdn Bhd (BASF owns theremaining 60%) is planning to expand its C3 value chain with a new plant forsuperabsorbent polymers as well as to expand the production capacity of itsexisting glacial acrylic acid unit. Currently, this associate company operatesan integrated complex with acrylic monomers, oxo products and butanediolproduction facilities at the Gebeng Industrial Zone. In the recent quarterlyresults, this unit reported disappointed earnings due to lacklustre demandand  lower prices. As a result, PCHEM's4Q11 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 onPCHEM'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 itsgroundbreaking last month, is expected to come on-stream only by 2015. Hence,the immediate earning drivers will only be petrochemicals prices and itsplants' utilisation. Give the strong petrochemicals prices YTD, 1Q12 is likelyto be a strong quarter for PCHEM. 

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

Source: Kenanga