News  Yesterday, Petronas Chemicals Group Bhd (PCHEM) announced that the Board of BASFPETRONAS

Chemicals Snd Bhd (BPC), the 40:60 JV between PCHEM and BASF Nederland BV, has approved the Final Investment Decision (FID) of the RM1.5b integrated aroma ingredients complex in Gebeng, Kuantan.

 This project, which was announced in April 2013, will be integrated with the existing facilities of BPC located in Gebeng, Kuantan. It will include a new world-scale plant to manufacture Citronellol and Lmenthol, and will be developed in phases with the first plant expected to come on stream in 2016.

Comments  This is positive to the partnership between PCHEM and BASF as even though BASF had pulled out of the RAPID project in Jan 2013, their JV partnership in the Gebeng facilities remains unchanged and it has continued to work on new projects.

 To PCHEM, this venture is expected to open up a new business market for the gas-based petrochemical company into the flavours, fragrance and pharmaceuticals markets.

 Project financing wise, PCHEM should have no problem as its balance sheet is in a strong net cash position of RM10.16b as at Dec 2013.

Outlook  Although FY14 remain challenging due to heavy maintenance activities, it will be less heavy than

FY13. Contrary to FY13, the maintenance schedule is heavier on F&M segment compared to the O&G segment. Nonetheless, we expect overall plant utilisation to improve slightly to 78.4% in FY14 from 77.9% in FY13.

 On the other hand, the F&M’s methanol facilities faced gas supply constraint in 1Q14 as a result of extended upstream facilities shutdown to conduct offshore technical works.

Changes To Forecasts With new FY14 assumptions of (i) plant utilisation of 78.4% from 85.0%, (ii) USD/MYR of 3.25 from 2.83; and, (iii) oil price of USD102/bbl from USD109/bbl, we trimmed FY14 estimates by 6.7%.

 We also extended our estimates horizon to FY16 with earnings growing by 5% in FY15 on higher utilisation and strong ASP, but FY16 earnings is set to decline 4% on weaker USD and ASP. The FY15-FY16 assumptions are: (i) plant utilisation: 80.5%-85.6%, (ii) USD/MYR: 3.19-3.15, and, (iii) oil price: USD106-103.

 Our forecasts do not include the earnings contribution from (i) SAMUR; and, (ii) this new JV.

Rating Maintain OUTPERFORM

Valuation  We roll over our valuation base year to CY15 with an unchanged target PER of 15x, new TP is now RM7.31/share from RM7.47/share previously.

Risks to Our Call A reversal of the current strong USD/MYR rate and a sudden drop in crude oil prices.

Source: Kenanga