Petronas has finally approved the long-awaited high-profile RAPID with a higher investment of USD27b from its previous indicative cost of USD20b. This is definitely a major boost to the local oil & gas industry especially for the downstream sector as it moves into high margin specialty petrochemical products. The increase in investment, which comprises of USD16b for RAPID and USD11b for other associated facilities, also means that Petronas is committed to this ETP project, positioned to be the next regional downstream oil & gas industries hub. We see two immediate beneficiaries from this latest development, i.e., (i) PCHEM, the key player involved in this project and, (ii) DIALOG, boosted by first mover advantage as it already has facilities in Pengerang. FID for RAPID is approved finally. Yesterday, the Board of Petronas approved the Final Investment Decision (FID) for the development of the Pengerang Integrated Complex (PIC) in Johor. This marks a significant milestone in the progress of the proposed PIC. Under the Approval, the Refinery and Petrochemical Integrated Development (RAPID) is estimated to cost c.USD16b while the associated facilities will involve an investment cost of c.USD11b. The total investment cost of USD27b is higher than the previous indicative cost of USD20b which signified that Petronas is highly committed to this Economic Transformation Program (EPT) project which will eventually position Pengerang as the next regional downstream oil & gas industries hub.

The first start-up by early 2019. Under the plan, PIC, which is to be developed within a 6,242-acre site, will consist of a 300,000 bpd refinery and a petrochemical complex with a combined capacity of 7.7 mtpa producing high grades differentiated and specialty chemicals products. The project is poised for its refinery start-up by early 2019. This will further strengthen Petronas’ position as a key player in the Asian chemicals market. On the other hand, the PIC will also see the development of other associated facilities such as raw water supply facility, power co-generation plant, LNG regasification terminal (RGT) and other ancillary facilities. At the operational stage, the PIC will require 4,000 employees.

To benefit the downstream oil & gas industry. We see two immediate key beneficiaries for the PIC project, i.e., (i) PCHEM (OP; TP: RM7.47) and (ii) DIALOG (OP; TP: RM3.92) as PCHEM is the key player involved in the petrochemical products while DIALOG has the first mover advantage given it already has facilities there. For the associated facilities, PETGAS (UP; TP: RM20.77) is likely to be involved in the RGT project since it already has the experience in running the Melaka RGT, while it should be involved in the transportation of gas/LNG there as well. For the planned 1,000MW gas fired plant, TENAGA (OP; TP: RM12.33), as usual will compete with IPPs, namely YTLPOWR (MP; TP: RM1.77), 1MDB (NOT LISTED) and MALAKOFF (NOT LISTED) while PESTECH (OP; TP: RM4.93) will likely be the front runner for the energy infrastructure work.

PCHEM: positive price and earnings catalysts. PCHEM has been a laggard in the past two years as opposed to the overall market as well as its sister Petronas companies, PETGAS and PETDAG (NOT RATED), given the lack of earnings catalysts. In view of the tough business environment for petrochemical products coupled with the new earnings contributor – the SAMUR project in Sabah will kick start earliest by 2015, PCHEM’s earnings in near-term is expected to be less exciting. However, this PIC project will be a key catalyst to PCHEM, although there is no impact to earnings at least till 2019. As this FID will re-rate PCHEM to higher earnings multiplier, we are upgrading our targeted CY14 PER to 15x from 14x as this is the highest valuation back in March 2012. Thus, our new price target on PCHEM is now RM7.47/share from RM6.97/share, with recommendation upgraded to OUTPERFORM from MARKET PERFORM.

DIALOG: the gateway to RAPID. As mentioned previously in our 1Q14 and 2Q14 Strategy reports, we believe DIALOG will be one of the first beneficiaries as the company has the first mover advantage, in term of setup cost and working environment experience in Pengerang. During our last site visit, we noted that reclamation for Phase 2 (where the RAPID will be situated) has already been completed hence scalability is unlikely to be an issue for DIALOG. For now, all that pending is further details on the potential additional capacity and the stakeholder’s equity position for tank terminal at the RAPID project. To recap, DIALOG is already at advanced stages of Phase 1, where Phase 1A is tentatively expected to be completed by 1H14. Phase 1B and 1C are tentatively guided to be completed in mid-2014 and end-2014. We maintain our OUTPEFORM and target price of RM3.92/SoP share on DIALOG. It is also one of our TOP PICK for 2Q14 Strategy.

Source: Kenanga