Investment Highlights

• We maintain our BUY recommendation on Petronas Chemicals Group (PChem) with an unchanged fair value of RM10.40/share based on an unchanged FY19F EV/EBITDA of 10x — 3SDs above its 3-year average of 8x given the stock’s correlation to crude oil prices.

• The group has entered into a sale and purchase agreement to wholly acquire Netherlands-based Da Vinci Group BV for €163mil (RM762mil) cash from a group of investors including Bencis Capital Partners.

• As Da Vinci is a private business involved in own-brand reselling, formulating and manufacturing of silicones, lube oil additives and chemicals, the acquisition is part of the group's continuing strategy of penetrating further downstream into differentiated specialty products which are cushioned from commodity price cycles.

• This operation will enable PChem to establish an endproduct presence in personal care, construction, paints & coatings, electronics, automotive and healthcare in the Asia Pacific region.

• The acquisition price accounts for 1% of PChem’s market capitalisation and 7% of its net cash position of RM10bil as at 31 Dec 2018. Given its huge asset base of RM37bil, PChem does not expect any significant impact to its earnings or net book value from this development.

• Even though management’s market guidance for 1QFY19 was bearish, we remain sanguine given that the group’s product prices have a strong correlation to Brent crude oil prices which have risen by 42% since 31 December 2018 to US$74/barrel currently.

• We estimate that a 1% increase in average product prices will translate to a 3% rise in net profit.

• PChem currently trades at a reasonable FY19F EV/EBITDA of 9x, which translates to a 26% discount (vs. its 3-year average discount of 17%) to Taiwan-based Formosa Petrochemicals’ premium 12x, while its dividend yields are fair at 4%.

Source: AmInvest Research - 17 May 2019