Investment Highlights

• We maintain BUY on Petronas Chemicals Group (PChem) and its fair value of RM10.13/share, pegged to an unchanged FY23F EV/EBITDA of 8x and a premium of 3% for its 4-star ESG rating. This is at parity with PChem’s 2-year EV/EBITDA average.

• PChem has announced that a fire and explosion incident occurred at one of the interconnecting pipes located in its 50%-owned Pengerang Integrated Complex (PIC), Johor on 27 Oct 2022. Fortunately, the fire was quickly extinguished within an hour with no reported casualties.

• Despite the lack of clarity about the potential impact on PIC’s operations, we believe the incident would likely trigger investigations into the complex’s safety issues. This could then give rise to operational disruptions, holding up the long awaited commercialisation of the complex.

• Recall that there has been a number of fire breakouts at PIC over the past few years, with the most recent incident being reported back in March 2020 which resulted in the deaths of 5 persons. The deadly fire incident resulted in intensive investigations and subsequently led to delayed commissioning of PIC’s operations by up to 6 months.

• As highlighted previously, the group is gradually commissioning operations for its 50% stake in PIC’s petrochemical operations, with an anticipation to start booking in financial contributions by December this year. Management had also guided for the plant to achieve an initial 50–60% utilisation in 2H2022 and subsequently ramp up to 90% in FY23F.

• While we had earlier forecasted minimal earnings contributions from PIC given the gestation period of 4-6 months in reaching commercialisation stage, we caution that the new fire incident may result in further delays in the process, which could affect near-term earnings outlook.

• In the event that another investigation transpires, we conservatively estimate that a 3-month delay in the commercialisation of the complex may slightly reduce Pchem’s FY23F-24F earnings by 1.5-2.1%, assuming the absence of sudden changes in product prices. For now, we maintain our forecasts pending further clarity from the group.

• Given the improving earnings prospects of the group’s operations in tandem with still elevated petrochemical prices, PChem currently trades at an attractive FY23F EV/EBITDA of 7x, below its 2-year average of 8x and offers compelling dividend yields of 6%.

Source: AmInvest Research - 31 Oct 2022