Stock Name: PCHEM
Company Name: PETRONAS CHEMICALS GROUP BHD
Research House: OSK

Petronas Chemicals Group Bhd
(Dec 28, RM5.53)
Maintain neutral at RM5.53 with target price of RM5.51: On Monday, Petronas Chemicals Group announced on Bursa Malaysia that a fire had broken out at about 11.35pm last Friday, at the naphtha hydrotreater unit at an aromatic plant within its integrated petrochemical complex (IPC) in Kertih, Terengganu.

We understand that the fire was quickly put out, and although there were no casualties, plant operations have been suspended as a safety precaution. We understand that this was a minor incident as operations at the other facilities within the IPC were not affected. Petronas Chemicals is still waiting for the authorities to determine the damage.

Heavy naphtha is used to produce two chemical products ' paraxylene and benzene. Based on our FY2011 forecasts, these two chemicals make up about 26% of the olefins and polymers division's revenue and 20% of group revenue (comprising olefins and polymers as well as fertiliser and methanol). Hence, the financial impact will depend on how long operations are disrupted, which we are unable to assess at this point. However, judging from the total revenue contribution from paraxylene and benzene of about RM2.5 billion, a day's delay would give rise to a revenue loss of about RM7 million. Assuming an average net profit margin of 18% for its chemical products, this may lead to a loss of RM1.3 million per day on a rough calculation. For FY11, we forecast total revenue and net profit of RM12.7 billion and RM2.2 billion respectively. We are also keeping our FY11 forecast unchanged unless the recommencement time line is prolonged. As for the damage caused by the fire, we would assume the company is fully insured.

Our target price for the stock remains unchanged at RM5.51 based on a price-earnings ratio of 16 times FY12 earnings per share. Since the fire has been put out, we do not think there is any further downside to its current share price as a result of this piece of news, unless there is a delay in re-coommencing operations, which we do not anticipate. Despite our 'neutral' call, we continue to like the company's strong backing from Petronas Group, especially in keeping its feedstock prices low, and attractive dividend payout ratio of 50%, which is the highest among its closest peers. ' OSK Investment Research, Dec 28


This article appeared in The Edge Financial Daily, December 29, 2010.