Investment Highlights

• We maintain our BUY recommendation on Petronas Chemicals Group (PChem) with an unchanged fair value of RM8.35/share based on a FY18F EV/EBITDA of 8x, on par with its 3-year average.

• While PChem’s FY17F-FY18F earnings are maintained, we have lowered FY19F earnings by 4% as the potential returns from the commencement of the Pengerang petrochemical operation at the Refinery and Petrochemical Integrated Development (RAPID) will be cut by half.

• PChem announced today that it has entered into a share purchase agreement to dispose of half of its equity interest and shareholder loans in PRPC Polymers (PP) to Saudi Aramco’s wholly-owned Aramco Overseas Holdings Cooperatief U.A. for US$0.9bil (RM3.8bil) cash.

• This divestment at cost, which will not lead to any significant gains or losses, is not surprising given the announcement earlier this year that Saudi Aramco will be investing in a 50% stake in Petronas Refinery and Petrochemical Corporation S/B, based in Pengerang Johor.

• As the disposal will roughly halve the group’s revised capex of US$2.8bil for the Pengerang facilities, excluding the US$443mil isononanol plant, with the likely deconsolidation of PP’s debts as a “joint operation company”, we expect PChem’s net cash position to improve by RM1.5bil by end-FY17F, which could fund alternative projects.

• We are mildly positive on this development as PChem will be diversifying its risk profile with a lower equity stake in PP and the over US$1bil capex still to be spend on this project while securing feedstock supplies as Saudi Aramco will be selling 70% of PP’s crude needs.

• PChem could also leverage Saudi Aramco’s expertise in integrated petrochemical projects, which also opens up future strategic joint-ventures.

• For the rest of the year, the group’s product prices are likely to improve with Brent crude oil prices trading above US$50/barrel. This has a close correlation with olefins and derivatives vis-a vis a flat QoQ naphtha and urea prices in 2QFY17.

• Nevertheless, we expect PChem's 2HFY17 earnings outlook to be stable on flattish production volume as the ramp-up of the 1.2mil tonne capacity SAMUR could be largely offset by plant turnaround activities for the existing Optimal Glycols, ammonia and methanol plants which could cause overall utilisation rate to drop below 90%.

• As there may be an analyst briefing tomorrow, we will provide further updates on this development. The stock now trades at an attractive FY18F EV/EBITDA of 7x, below its 3-year average of 8x, while dividend yields are attractive at 4%.

Source: AmInvest Research - 2 Oct 2017