HLBank Research Highlights

Petronas Chemicals Group - To Ride on Elevated Product Spreads

HLInvest
Publish date: Thu, 19 May 2022, 09:37 AM
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This blog publishes research reports from Hong Leong Investment Bank

Our findings of sustained elevated polyethylene, urea and methanol prices have led us to believe that PCHEM’s upcoming 1Q22 results (slated for release on 27 May 2022) – would be strong (flattish QoQ against record high profits in 4Q21). Also earlier this week, PCHEM announced that it is acquiring the entire equity interest in Perstorp Holding AB (a global specialty chemicals company) for RM7.0bn. We view this acquisition to be in-line with PCHEM’s long-term strategy to further diversify into the specialty chemicals industry while enhancing the group’s overall earnings. Overall, we are positive on this development. In anticipation of a stellar set of results in PCHEM’s upcoming 1Q22 results, we raise our FY22f earnings forecast by 13% after accounting for higher average product spread and urea price assumptions. We maintain BUY on PCHEM with a higher TP of RM11.76/share (from RM10.43 previously) – based on a P/E multiple of 14x of FY22F earnings, which in-line with its 5-year mean valuations.

Indications leading to a strong 1Q22. Using HDPE, LDPE and LLDPE prices as indicators for PCHEM’s product spreads, our research shows that average polyethylene prices remained somewhat flat QoQ, ranging from -2% to +3% in 1Q22 from 4Q21 (Figure #1). On the other hand, we highlight that average urea and methanol prices were also stable throughout 1Q22 at -5% and +3% respectively from 4Q21 (Figure #2). With that, we are expecting a strong 1Q22 results (flattish QoQ against record high profits in 4Q21) – which is slated for release on 27 May 2022.

Acquisition of Perstorp Holding. Earlier this week, PCHEM announced that it is acquiring the entire equity interest in Perstorp Holding AB (a global specialty chemicals company) for RM7.0bn. Perstorp was established more than 140 years ago and is present in 26 different countries worldwide – including Europe, US and Asia Pacific. We highlight that the acquisition will be completed in 4 months from now. The group also has 7 manufacturing sites and 3 R&D facilities globally. In FY21, Perstorp recorded c.RM6.5bn in revenue and RM1.2bn in EBITDA.

In-line with PCHEM’s strategy to diversify into specialty chemicals. Based on our understanding, this acquisition is in-line with PCHEM’s strategy to further diversify into the specialty chemicals industry while enhancing the group’s overall earnings . This would allow PCHEM to participate in attractive end-markets such as paints & coatings, construction, automotive, personal care and animal nutrition that share a robust growth outlook. We understand that Perstorp’s revenue and EBITDA has been increasing steadily over the past 5 years and this was due to higher product ASPs and sales volumes. We note that EBITDA margin remained consistent, ranging from 15- 20% as the group is able to pass through its incremental feed costs to its customers – resulting in fairly stable profitability margins.

Immediate-term focus. PCHEM has mentioned that the near-term focus would be to grow Perstorp’s profits QoQ and YoY while preserving its profit margins. We highlight that there may be potential synergistic opportunities between PCHEM and Perstorp as PCHEM produces two of Perstorp’s key feedstocks – propylene and methanol.

Additional production capacity and valuation of acquisition. The acquisition of Perstorp will add up to 2.3mtpa to PCHEM’s production capacity and contribute about 28% incremental revenue to PCHEM. Valuation wise, the acquisition implies a trailing (12M up to March 2022) EV/EBITDA of 8.3x – which we deem to be fair given: (i) the comparable transactions involving acquisition of companies in the past 10 years (which ranges from 6.9x to 15.7x); and (ii) comparable companies which were selected based on their respective principal activities in the specialty chemicals industry (which ranges from 6.1x to 9.8x). Overall, we are positive on this development.

More acquisitions in the pipeline? PCHEM has guided that they do not discount the possibilities of future M&A over the next few years. However, the group’s near-term focus is to grow Perstorp. Perstorp is estimated to require c.EUR100-200m annually for growth and maintenance capex. We also note that there will be an additional 10% of production capacity incoming over the next 3 years.

Forecast. In anticipation of a strong 1Q22 results slated for release on 27 May 2022, we raise our FY22f earnings forecasts by 13% after accounting for higher average product spread and urea price assumptions. We believe our previous forecast and assumptions was a bit too conservative. Note that our forecast has not imputed the earnings contribution from Perstorp.

Maintain BUY – TP: RM11.76. We maintain BUY on PCHEM with a higher TP of RM11.76/share (from RM10.43 previously) – based on a P/E multiple of 14x of FY22F earnings, which in-line with its 5-year mean valuation.

 

 

Source: Hong Leong Investment Bank Research - 19 May 2022

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