- As Petronas Chemicals Group’s (PChem) share price has risen by 11% since our upgrade in August this year to this year’s peak of RM7.21/share last month, we have downgraded our call from BUY to HOLD with an unchanged fair value of RM7.60/share, pegged to a FY14F EV/EBITDA of 7.5x – which is at a 10% premium to Thailand’s PTT Global Chemicals’ (PGC) 6.8x.

- We expect PChem’s 3QFY13 results, which will be announced this evening, to be within our expectations. Hence, we maintain PChem’s FY13F-FY15F earnings for now.

- PChem has entered into an agreement to divest its entire 93% equity stake in Phu My Plastics and Chemical Company Ltd (PMPC) to Asahi Glass Co. Ltd. and Mitsubishi Corporation for an undisclosed price.

- The divestment of PMPC, which is located in Vietnam with a production capacity of 100,000 metric tonnes per annum of polyvinyl chloride (PVC), is expected to complete by 2Q14F.

- We are not surprised by this development which is part of PChem’s earlier announced plan to discontinue its vinyl business, and is in line with its portfolio optimisation strategy. The group has earlier estimated loss on disposal of its PVC business, both locally and overseas, at RM560mil but provided for RM490mil in 4QFY12.

- While the announcement did not reveal the selling price, we do not expect any more significant provisions in FY13F. PVC prices has surged by 18% from November 2012 to US$1,080/tonne in March 2013, before declining to US$980/tonne currently, which is still above the product price when PChem indicated its intention to sell its PVC operations.

- Since 30 September this year, the price for WTI crude oil has declined by 9%, methanol 9%, ethylene 6%, benzene 6% and paraxylene 3%, while naphtha rose by 3% with polyethylene, polypropylene and urea largely unchanged (See Charts 1-4).

- The strengthening of the ringgit vs. USD by 3% since 30 September this year will have a slightly net negative impact on PChem given its largely USD-denominated revenues. While a large portion of the group’s raw material costs are naturally hedged, we estimate that a 10% appreciation in ringgit vs. USD will translate to a 5% decrease in FY14F earnings.

- The economic outlook in US and Europe (see Chart 9) currently appears mixed, which partly led to lower crude oil prices which have strong correlations to the margins of PChem’s olefin operations. The stock currently trades at a fair FY14F EV/EBITDA of 6x, which is 10% below PGC’s 6.8x.

Source: AmeSecurities