• Pchem is acquiring Perstorp from a European PE firm for €2.3bn (or RM10.5bn). Perstorp is a specialty chemicals provider in resins, coatings, engineered fluids and animal nutrition.

• We are positive with this acquisition as it provides further expansion opportunities in growth market in the long run. However, at 8.2x FY21 EV/EBITDA and 14.8x P/E amidst elevated product prices, we think the price tag is quite pricey.

• No change to our earnings forecast at this juncture pending more details from management.

• Maintain SELL on PChem with unchanged DCF-derived TP of RM9.00 which implies 12x FY23F P/E. While we are positive on its long-term growth outlook in specialty chemicals, we remain cautious on potential correction in the traditional petrochemical market in the near-term.

Acquiring a large specialty chemical producer

PChem announced that it is acquiring Perstorp from a European Private Equity firm, PAI Partners for a hefty sum of €2.3bn (c.RM10.5bn) including debts worth €847m (or RM3.5bn). Perstorp is a leading specialty chemicals company with a 140 years’ history that operates from 7 state-of-the-art manufacturing sites and 3 R&D centres worldwide. PChem plans to utilise its large cashpile of c.RM16bn to complete the acquisition.

Towards fulfilling its specialty chemical ambition

We are positive with this acquisition as it is inline with PChem’s long-term growth strategy. To recap, it targets its specialty chemicals segment to contribute to c.30% of its revenue stream by 2030 (FY21: 5.5%) as part of its plan to diversify away its earnings from cyclical commoditised chemical market. This is also its second acquisition in the specialty space following the acquisition of Da Vinci for €163m back in 2019. Consequently, its specialty product portfolio will be expanding from silicone and lube oil additives to attractive end markets such as paints and coatings, construction, automotive, personal care and animal nutrition.

Valuation is quite rich, in our opinion

We are wary that the purchase price may be quite stretched given the timing of the acquisition is made at the time the rally in petrochemical product prices is at the extreme level. The purchase price implies 8.2x FY21 EV/EBITDA and 14.8x FY21 P/E (see Table 1). As such, this could expose the company to the recognition of large goodwill value and impairment risk upon completion of the acquisition. This is, however, slightly cushioned by the potential earnings contribution from Perstorp’s new plant in Sayakha, India which is expected to reach mechanical completion by 2024.

Earnings impact

According to the announcement, Perstorp achieved PAT of RM473m in FY21 which is equivalent to c.6% of PChem FY21 earnings. We think this may not be sufficient to offset any potential decline in its commoditized chemical earnings which are currently elevated due to supply disruption and high feedstock costs.

Maintain SELL with unchanged TP of RM9.00

We maintain our SELL recommendation on Petronas Chemicals with a similar DCF-derived TP of RM9.00 which implies 12x FY23F P/E. Our DCF is based on WACC of 8.0% and terminal growth of 0% (Table 2). While we are positive on its long-term growth outlook in specialty chemicals, we remain cautious on potential correction in the traditional petrochemical market in the near-term.

Source: BIMB Securities Research - 18 May 2022