Investment Highlights

• We maintain BUY on Petronas Chemicals Group (PChem) with an unchanged fair value of RM9.94/share, pegged to an FY23F EV/EBITDA of 8x (at parity to its 2-year average) and a premium of 3% for our 4-star ESG rating.

• PChem entered into a heads of agreement to divest a 25% equity interest in its 100%-owned Petronas Chemicals Fertiliser Sabah (PCFS) to SMJ, wholly-owned by the Sabah state government. The divestment is expected to be completed in 2023. Pending further information from management, we maintain our FY23F-24F earnings.

• Established in 2011, PCFS owns and operates an integrated ammonia and urea production complex located in Sipitang Oil and Gas Industrial Park (SOGIP) in Sabah. With a designed production capacity of 1.9 mil metric tonnes per annum (equivalent to 15% of group’s total production capacity of 12.7mil tonnes), PCFS’ facility is the largest single-train ammonia and urea plant in Southeast Asia and the third largest urea plant in Asia Pacific.

• The acquisition comes after the recent acquisition of Petronas’ downstream gas pipeline assets and supply of natural gas contracts by the Sabah state government via Sabah Energy Corporation. Moreover, Sabah chief minister Datuk Seri Hajiji Noor also said earlier that Petronas has agreed to divest stakes in some other projects in Sabah, which may potentially include liquefied natural gas and Sabah Ammonia Urea (SAMUR) projects in SOGIP.

• Despite the lack of clarity at this juncture, we estimate the divestment of a 25% stake in PCFS may result in a slight decline in our FY23F-FY24F earnings by 2-3%. While the divestment price is not revealed yet, we expect it to slightly improve the group’s balance sheet from the disposal proceed to be realised from the corporate exercise.

• Outlook-wise, we expect near-term earnings weakness to persist from a downswing in petrochemical prices in tandem with the decline in oil prices, notwithstanding our expectations of higher plant utilisation rates of above 95% in 4Q22 vs 85% in 9M22 given the absence of plant turnarounds and heavy maintenance.

• On a positive note, the incremental contributions from Perstorp Holding AB coupled with the gradual start-up of Pengerang Integrated Complex (PIC) would also partially cushion subdued petrochemical product prices currently.

• 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 - 10 Jan 2023