- We maintain our HOLD call on Petronas Chemicals Group (PChem), with an unchanged fair value of RM7.00/share, pegged to an unchanged FY13F EV/EBITDA of 7.5x – which is at a 10% premium to Thailand’s PTT Global Chemicals.

- PChem announced its intention to jointly invest US$500mil (RM1.5bil) with BASF in an integrated aroma ingredients project, which is part of the group’s existing 40:60 JV with BASF in Gebeng, Kuantan.

- Expected to commence operations in phases beginning in 2016, this new world-scale citral and precursor plant will produce aroma ingredients such as L-menthol and citronellol.

- Citral is the main component of many essential oils like lemongrass and is used as fresh-citrus and fruity notes in fragrances and flavours. It is used to produce vitamins A and E. Citronellol is used for long-lasting rose fragrances while L-menthol offers a cool freshness as an ingredient in oral care, body care, flavourings and pharmaceutical applications.

- We are positive on this development, following PChem’s termination of an earlier joint venture with BASF to build a specialty chemicals joint venture in Pengerang, Johor in January this year due to a dispute over the marketing rights of the products. But subsequently, another German company, Evonik AG, has expressed interest to build such a plant in Pengerang.

- But given that this new plant will commence operations beyond our forecast period, we maintain FY13F-FY15F earnings. In the longer term, this new aroma ingredient plant will further provide specialisation, branding and diversification to PChem’s product mix, potentially reducing its exposure to commodity market cycles.

- Note that PChem and BASF started their joint-venture in 1997 in building the RM3.4bil plant in Gebeng, which currently produces acrylic monomers, oxo products and butanediol, using propylene and N-butane feedstock from wholly-owned MTBE Malaysia.

- In the near- to medium-term, the outlook for olefin, polymer and methanol prices is clouded given the uncertain global economy. Since the end of February this year, European Brent crude oil prices have fallen by 8%, while polyethylene has fallen by 7%, methanol 7%, xylene 8%, ethylene by 3% and benzene 3%.

- The stock currently trades at a fair FY13F EV/EBITDA of 7.4x, which is at a 9% premium to PTT Global Chemicals’ 6.8x.

Source: AmeSecurities