News     Petronas Chemicals Group Bhd (PCHEM) announced that its 40:60 JV with BASF, namely BASF Petronas Chemicals, is expanding its existing product range to build an integrated aroma ingredients complex at its existing facilities in Gebeng, Kuantan for USD500m.

With the first plant to be operational in 2016, the complex will include citral and precursor plants. The partners will also invest in the downstream production for aroma ingredients, including a new world-scale plant for L-menthol and a plant for citronellol.

The project is subject to a Final Investment Decision approval by the JV’s Board by end-2013.

Comments     This news is definitely positive as it showed that even though BASF had pulled out of the RM60b RAPID project in Jan-13, the JV partnership in the Gebang facilities remains unchanged and it has continued to work on new projects.

This venture will open up a new business market for PCHEM into the flavours, fragrance and pharmaceuticals markets.

With its net cash of RM9.3b (as at Dec-12), the financing of this project should not be an issue for PCHEM.

Outlook     Due to the lack of details, the earnings impact to the group is hard to quantify for now.

Meanwhile, a continued rise in volume and prices as well as a healthier matching of supply and demand should help improve the company’s upcoming 1Q13 results, where 1H is usually the seasonally low period for its earnings.

Changes To Forecasts    There are no changes to our FY13E-FY14E earnings estimates.

Rating     MAINTAIN OUTPERFORM

Valuation     Our price target is maintained at RM6.86/share based on a CY13 targeted PER of 14.5x. Our targeted PER is in line with its recent PER high of 14.4x in Oct 2011 after normalising from the peak of 20.0x in Mar 2011.

Risks      A weaker USD vs. MYR rate and a sudden drop in crude oil prices.

Source: Kenanga