- We maintain our HOLD rating on Petronas Chemicals Group (PChem) with a higher fair value of RM6.20/share (vs. RM5.30/share previously), pegged to a higher FY15F EV/EBITDA of 8.5x. This follows the recent re-rating of the sector, with the EV/EBITDA of the Bloomberg Asia Pacific Chemical Index improving by 20% YoY.

- PChem announced that the group and Germany’s BASF will jointly build a new world-scale production plant in Kuantan for highly-reactive polyisobutene (HR-PIB). The production of the plant is expected to commence in 4QFY17.

- The new plant, which will have an annual capacity of 50,000 tonnes of HR-PIB, would be at the site of their existing joint venture, BASF Petronas Chemicals Sdn Bhd. HR-PIB is an important intermediate product for the manufacturing of high-performance fuel and lubricant additives, including additives for sludge prevention.

- We understand that the investment is in line with the group’s strategy to diversify into specialty chemicals and solutions. BASF currently also has production facilities for HR-PIB in Germany, Belgium and China.

- We do not expect the new plant to have a significant contribution to the group given that the annual capacity is small compared with the group’s annual production capacity of more than 10mil tonnes.

- PChem’s plant utilisation rate had improved to 90% in 1QFY15, following the completion of major turnaround and maintenance shutdowns in 2013 and 2014. However, management expects the plant utilisation to normalise to 80%-85%, as there will be planned turnaround activities at two of its plants beginning 2QFY15.

- The outlook O&D market is expected to remain uncertain in the near term given the uncertainty in crude oil and naphta prices. F&M will also remain challenging due to higher supplies of fertilisers anticipated from China following changes in their export tax structure.

- The SAMUR plant, which will increase production capacity from 1.4mmtpa to 2.6mmtpa, is on track for completion by 1QFY16. Additionally, PChem will incur borrowings going forward to fund its future projects, including RAPID, with a maximum net debt/EBITDA level of 2x.

- The stock is currently trading at an FY15F EV/EBITDA of 9.2x, which is above PTT Global Chemicals’ 7.07x.

Source: AmeSecurities Research - 22 Jul 2015