OSK Research has initiated coverage on Petronas Chemicals Group Bhd with a buy recommendation and target price of RM5.51.

The target price was based on a 16 times price earnings ratio (PER) financial year 2012 earnings per share, it said in a research note here.

OSK Research said the company deserved such valuations because of the strong support from the Petronas group, especially in terms of low feedstock' prices and its attractive dividend payout ratio of 50 per cent.

Petronas Chemicals, a leading integrated petrochemical producer in the South-East Asian region, is scheduled for listing on Bursa Malaysia on Nov 26.

It has fixed the price of its initial public offering (IPO) at RM5.04 per share for the portion reserved for retail investors and at RM5.20 apiece for shares to be sold to institutional investors.

Petronas Chemicals expects to raise gross proceeds of about RM3.5 billion from the exercise. The listing is to consolidate all of Petronas' petrochemical activities into a single entity.
The company has two core business segments, comprising olefins and polymers, and fertilisers and methanol.

The olefins and polymers business dominates the group's product mix contributing 70 to 75 per cent of its revenue while the balance is mainly contributed by the fertilisers and methanol business.

For the petrochemical industry, OSK Research expects the industry to remain under pressure as further capacity is forecast in the immediate term.

However, it also sees a gradual recovery in the industry in terms of utilisation rates and margins starting from next year and peaking in 2015, it said.

OSK Research said the recovery will be driven by the Asia Pacific markets, where growth rates are higher compared to developed markets due to the lower level of material substitution for petrochemicals.

These petrochemicals are increasingly used to substitute basic materials like wood, glass, metals, paper and card in the packaging, automotive and construction industries as they offer higher performance at a lower cost, it said. -- Bernama