Following the analyst briefing, we are excited with the involvement of PCHEM in the high profile RAPID as it will be a major earnings catalyst for the petrochemical company. RAPID will be a fully integrated facilities and infrastructure set-up to ensure reliable feedstock supply and other supporting facilities to offer the player operates effectively in a competitive environment. Focus of this project will be on high margin specialty products while the concept of integrated facilities could help to reduce operating cost thus propel profitability into another level. Capacity-wise, RAPID project’s nameplate capacity of 3.5m tpa will add PCHEM’s capacity by another 32% from 10.8m tpa in 2014. So far, PCHEM has awarded an EPCC contract to build a 900k tpa PP Plant for USD482m early this week. With its committed capex of USD3.9b, we learnt that three other EPCC contracts will be awarded in the next few months. Despite the high capital investment, management reassured that there is no change in dividend policy. Maintain OUTPERFORM at price target of RM7.50/share.

A fully integrated project. Yesterday, we attended Petronas Chemicals Group Bhd (PCHEM)’s analysts briefing, which revealed the high-profile RAPID Petrochemical Project following the official announcement of its involvement in the project by acquiring three companies from its parent company, Petronas, early of the month. This project is expected to further strengthen PCHEM as a key Asian player. RAPID consists of full integrated facilities and infrastructure to ensure a reliable and competitive of feedstock supply by the 300kbpd crude oil refinery and a stream cracker while other supporting facilities, there will help PCHEM operates in a competitive environment. The supporting facilities include a liquid bulk terminal, a raw water supply project, air separation unit, a RGT, utilities, interconnecting and office as well as power plant. As such, this fully integrated project will be cost competitive.

Three main product plants. The USD3.9b petrochemical project consists of three main product lines, such as polymers, glycols and elastomers with nameplate capacity of 1.75m tpa, 1.4m tpa and 350k tpa, respectively, which could add another 32% capacity from 10.8m tpa in 2014. Eventually by 2021, the total nameplate capacity of PCHEM would reach 16.2m tpa. So far, PCHEM has awarded an EPCC contract for a 900k tpa Polypropylene (PP) Plant worth a total of USD482m on a lump-sum basis to an Italian-Chinese led consortium this Monday with a targeted completion timeline of Apr 2019. We learnt that three other EPCC contracts are currently under the tendering process with outcome to be announced in the next few months while the completion of these three plants will be at the same timeline as the PP Plant. As such, these RAPID Petrochemical Plants will be fully operational by not later than 2020.

High capex but dividend here to stay. The capex of USD3.9b will be largely USDdenominated while its products are sold in USD quotes as well. Therefore, it is a natural hedge to forex risk. With its current cash position of RM9.5b and no borrowings, PCHEM should have no problem financing the project over the next 4-5 years. The peak capex cycle of this project will be in 2017 and 2018 and management indicated that it can go for maximum of 2x EBITDA for borrowings. Based on FY14 earnings, the reported EBITDA was RM4.64b. Despite the higher capex requirement, management reassured that the 80% dividend payout policy will not be affected.

It is a 2020 story; OUTPERFORM retained. After few major turnaround activities in 2H13-1H14, plant utilisation has picked up to 88% in 3Q15, which is higher than world-class standard of 85%. This helps to improve earnings further. The SAMUR project will be the immediate growth driver as it kicks start in end-1Q16 to early-2Q16. On the other hand, RAPID project will be the next major earnings catalyst in the later part of 2019. As such, PCHEM looks promising with a long-term growth story which will transform it into a competitive player in the region, especially competing with the Middle Eastern players. More importantly the expansion plan will not affect its dividend policy. We maintain our OUTPERFORM rating with unchanged price target of RM7.50/share based on 17.3x CY16 PER which is 0.5SD below its 3-year mean.

Source: Kenanga Research - 27 Nov 2015