Petronas Chemicals; Fully Valued; RM6.92
Price Target: RM5.50; PCHEM MK

The media reported that Petronas has entered into a heads of agreement with BASF for the development of the Refinery & Petrochemical Integrated Development (RAPID) complex in Pengerang, Johor. Under the agreement, Petronas will hold a 40% stake in the JV while BASF will hold the remaining 60%.

The JV will be developing production facilities for specialty chemical products including isononanol, highly reactive polyisobutylene, non-ionic surfactants, methanesulfonic acid, and plants for precursor material which is part of the MoU signed between the parties in Dec10 for a potential joint investment of RM4bn in Pengerang and their existing facility in Gebeng, Pahang.

In addition, Petronas Chemicals and BASF will expand their C3 value chain with a new plant for  superabsorbent polymers, as well as to expand the production capacity of their existing glacial acrylic acid unit in Gebeng, pursuant to their feasibility study (initially to be concluded by end-11).

While the RAPID project is signed by Petronas, we believe that Petronas Chemicals, being the downstream subsidiary of Petronas is likely to be the owner and operator of the massive project when more details are finalized at the later stage of the feasibility study for the RAPID project which is expected to be concluded by end-12. The RAPID project is expected to be commissioned by 2016.

There is no change to our forecast. We reiterate our Fully Valued call with RM5.50 TP, based on 13x FY12 EPS. We remain cautious of PCG's near-term earnings outlook given the potentially weaker demand for petrochemicals and softer product prices. Also, there will not be any capacity growth for Petronas Chemicals at least for the next 3 years.

Source: HwangDBS Research 7 March 2012