Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with a higher fair value of RM11.10 (from an earlier RM10.90/share), pegged to a rolled-forward FY23F EV/EBITDA of 8x and a premium of 3% for our ESG rating of 4 stars. This is at parity to PChem’s 2-year EV/EBITDA average against the backdrop of elevated oil prices trading at US$100/barrel currently.

• We have also raised FY23F–FY24F earnings by 8%–9% to account for the value-accretive contribution from the group’s proposed acquisition of the entire equity interest in niche specialty chemicals group, Perstorp Holding AB, a sustainability-focused global specialty chemicals company, for €1.54bil (RM7bil or 9% of PChem’s market cap) cash from Financière Forêt S.à.r.l, a company under European private equity firm, PAI Partners.

• While Perstorp recorded revenues of SEK13.5bil (RM6.5bil) and pretax profit of SEK1.3bil (RM611mil) in 2021, the company’s 1QFY22 pretax profit surged 8.2x YoY to SEK460mil (RM206mil) from higher product prices in tandem with the crude oil price upcycle.

• Hence, based on 1QFY22 results and assuming European interest costs of 2%, we are projecting a higher 9% increase to our prospective earnings vs. PChem’s Bursa Malaysia announcement illustration of a 4% EPS rise based on FY21 historic results.

• The proposed acquisition, expected to be completed in 2H2022, values Perstorp Group at an enterprise value of €2.3bil (RM10.5bil), including borrowings. Given the group’s gross cash of RM16bil and net cash of RM14bil, we expect PChem to internally fund this purchase.

• We are positive on this development, which will strengthen PChem’s basic petrochemicals portfolio and accelerate its expansion into higher margin derivatives, specialty chemicals and solutions. This involves end markets such as paints and coatings, construction, automotive, personal care and food, feed and nutrition, and access to common end markets that offer significant cross-selling opportunities and growth prospects to the rest of the group’s operations.

• We are not surprised by this acquisition as management has already highlighted intentions of expanding further into specialty chemicals. Recall that PChem acquired BRB Group (formerly known as the Da Vinci Group, NV), a leading global independent producer and formulator of silicones, lube oil additives and chemicals, for €163mil (RM761mil) in Sep 2019.

• Established more than 140 years ago in Sweden, Perstorp is a leading niche specialty chemicals player in resins & coatings, engineered fluids and animal nutrition markets. With 7 manufacturing sites and 3 research and development centres worldwide, Perstorp is present in 26 countries including the US, Europe and the Asia Pacific region.

• Perstorp has 1,500 employees and serves over 2,600 customers globally with 130 product offerings within 30 product groups. It is the global leader in products such as trimethylolpropane and pentaerythritol, and is recognised for its proprietary oxo and polyol chemistries. The company has developed a number of solutions such as the production of sustainable methanol from carbon dioxide, residue streams, biogas and green hydrogen at its Stenungsund site to replace a large portion of its fossil-based methanol feedstock by 2026.

• All in, we remain bullish on PChem’s earnings prospects given the strong correlation to its share price as firmer naphtha costs will support petrochemical product prices. Hence, we expect stable near-term earnings as Brent crude oil prices were recently traded at or above the US$100/barrel threshold vs. a 4Q2021 average of US$79/barrel.

• Given the improving earnings prospects of the group’s PIC operation in tandem with improved petrochemical price prospects, PChem currently trades at an attractive FY23F EV/EBITDA of 7x, below its 2-year average of 8x and offers compelling dividend yields of 5%.

Source: AmInvest Research - 18 May 2022