Investment Highlights

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

• Following the analyst briefing today and our report yesterday, PChem has provided further details on its proposed divestment of a 50% equity interest and shareholder loans in PRPC Polymers (PP) to Saudi Aramco’s (Aramco):

• The revised capex for the Pengerang petrochemical projects would have been US$3.6bil, including the US$443mil isononanol plant. However, Aramco will only be acquiring half of the US$3.2bil PP project.

• The PP construction progress is at 49% with US$1.2bil spent up to 31 August 2017. By 15 March 2018 when the proposed divestment is expected to be completed, the total capex could reach US$1.8bil, which explains the US$0.9bil (RM3.8bil) purchase consideration by Aramco for the 50% PP stake.

• Reaffirmed that there will be no significant gains from the divestment which will be almost wholly transacted at cost.

• Under MFRS 11 for jointly operational company, half of the earnings, assets and liabilities will be consolidated with the group’s financial results on a line-by-line basis.

• Hence, the group’s capex for FY17F remains at RM4bil but 10% lower for FY18F and RM1bil lower for FY19F when the facilities are expected to commence operation.

• Aramco will be marketing half of PP’s capacity of 3,050 tonnes as well as providing its expertise in operating integrated petrochemical projects in Saudi Arabia. The group will also look into further investing in PChem’s downstream prospects in specialty chemicals and derivatives.

• The proposed divestment’s inter-conditionality also applies to the US$7bil divestment of a 50% stake in Petronas’ cracker and refinery operations to Aramco, which was signed in February this year.

• We remain mildly positive on this development as PChem will be diversifying its risk profile with a lower equity stake in PP as there is almost US$2bil capex still to be spent on this project. Also, Aramco will also provide 70% of PP’s crude oil feedstock supplies while underwriting half of its production capacity.

• 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 - 3 Oct 2017