Investment Highlights

• We reiterate our BUY call on Petronas Chemicals Group (PChem) with unchanged forecasts and fair value of RM11.10/share, pegged to an unchanged 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 at US$100/barrel currently.

• We attended the group’s analyst briefing today on the proposed acquisition of the entire equity interest in Sweden-based Perstorp Holding AB for €1.54bil (RM7bil or 9% of PChem’s market cap) cash from European private equity firm, PAI Partners. These are the salient highlights:

• The transaction represents part of PChem’s organic and inorganic growth strategy to build an additional 30% of revenue stream from non-traditional businesses by 2030. These involve specialty chemical pathways classified into: 1) food, feed and nutrition; 2) industrial additives; and 3) surfactants, household, industrial & institutional (HIBI) and personal care.

• Perstorp is a niche specialty chemicals manufacturer with a global presence and growing exposure to ESG trends which offer sustainable products with margins that are 10%–15% higher than conventional commodities.

• PChem plans to fully fund the entire enterprise value of RM10.5bil, including Perstop’s debt of €852mil (RM4bil) from its end-4QFY21 gross cash reserves of RM16bil as the acquiree’s cost of debt is currently high at 5%–6% given an FY21 net debt/EBITDA of 3x.

• Post-acquisition, management plans to refinance at a lower interest rate, backed by PChem’s stronger credit profile which has a net cash balance of RM14bil.

• Perstorp has 7 manufacturing sites globally (Exhibit 1) and does not derive any feedstock from Ukraine or Russia. It has ceased all business dealings with Russian customers, who have been a minor market for the group.

• Europe, the Middle East and Africa made up 55% of Perstorp’s 1Q2022 revenue, Americas 21% and Asia Pacific 24%.

• Perstorp’s €100mil–200mil annual capex for maintenence and growth will largely involve sustainable products such as green methanol under Project Air. These will expand the company’s current production capacity by 10% over the next 2–3 years and further entrench PChem’s ESG aspirations.

• Management expects strong complementary synergies given that Perstorp’s methanol feedstock is among PChem’s core product segments.

• All in, we remain positive on the proposed acquisition, 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 which offer significant cross-selling opportunities and growth prospects to the rest of the group’s operations.

• We also 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 have 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