Investment Highlights

• We maintain our BUY recommendation on Petronas Chemicals Group (PChem) with an unchanged fair value of RM7.05/share, pegged to an FY21F EV/EBITDA of 10x, 1 standard deviation above its 2-year EV/EBITDA average of 8.5x.

• PChem plans to buy a 50% stake in PCC Oxyalkylates Malaysia Sdn Bhd (PCCOM) for an undisclosed sum from PCC SE. PCCOM is building an oxyalkylate facility within the Kertih Integrated Petrochemical Complex, Terengganu to produce ethoxylates and polyether polyols.

• Ethoxylates are used to produce detergent, home care and personal care products while polyether polyols are used in foam mattresses and upholstery applications.

• PCCOM was set up in 2017 with the intention of expanding into the Asian region. Construction of the plant is scheduled to start next year with production commencing in FY23F.

• While the announcement did not reveal the specific capex for this plant, we understand that it could already be included in the total capex allocation of US$200mil–US$250mil (RM834mil– RM1bil), as guided by management during the 2QFY20 analyst briefing.

• This capex is expected to be spent over 3 years for 3 new specialty chemical projects – a silicone blending plant in Gebeng, a butadiene derivative facility in Pengerang Integrated Complex, and the Kertih operations. We have not incorporated any contributions from these investments yet as the commencement dates lie beyond our current projections.

• Nevertheless, we are positive on the group’s longer term prospects as these developments indicate management’s confidence in the growth in demand for specialty chemicals in the region. We estimate that a 10% return on investment translates to a substantive 6% of FY20F earnings.

• PCC SE, headquartered in Duisburg, Germany, is an international chemicals, logistics and energy corporation. The unlisted group is a global surfactant manufacturer with an established know-how gained over several decades in the development and production of surfactants and polyols.

• In the near term, the group’s FY20F plant utilisation rate (PU) is expected to be in the mid-90% level as the deferral of turnaround activities for Gebeng plant in 1Q20 to 4QFY20 could slightly moderate PChem’s operations. For FY21F, the group still expects PU levels of over 90% with 4 minor turnaround activities scheduled for methanol plants in Labuan and Gebeng as well as Asean Bintulu Fertilizer and Petronas Fertilizer Kedah.

• PChem currently trades at a fair FY21F EV/EBITDA of 8x vs. its 2-year average of 8.5x, while its dividend yields are attractive at 3% vs. the current low interest rate regime.

Source: AmInvest Research - 15 Sept 2020