News

Yesterday, PCHEM announced that it will not proceed with the proposed elastomers project in RAPID, which was announced earlier in Nov 2015. The project was planned to have an installed capacity of 350k mtpa with projected investment cost of USD1.3b.

With this cancellation, PCHEM announced that it remains committed to the rest of the petrochemical projects in RAPID, i.e., polymers and glycols projects, which are scheduled to start production in 2019.

Comments

This news came somewhat as a surprise to us as we did not expect the Petronas group to scale down/cancel any of its high profile RAPID projects as the downstream activities are deemed spared from the current depressed oil prices. PCHEM has cited the cancellation of the elastomers project on the product’s market outlook and projected return on investment.

To recap, PCHEM was the first to announce in Nov last year its official involvement in RAPID to build three petrochemical product lines, such as polymers, glycols and elastomers with nameplate capacity of 1.75m mtpa, 1.4m mtpa and 350k mtpa, respectively, with total committed capex of USD3.9b. So far, it has awarded three EPCC contracts worth a total of USD1.36b in Nov and Dec 2015 for product lines for: (i) polypropylene, (ii) linear low density polyethylene, and (iii) ethylene oxide ethylene glycol.

Although the elastomers project is cancelled, we believe the group is likely to add new product lines in the future when it is able to find suitable products, which match its investment criteria.

Outlook

This project cancellation will not have any earnings impact to the group in the immediate term given that RAPID is only targeted to complete in 2019. Overall, RAPID is a long-term growth story.

Immediate earnings kicker will be the new SAMUR facility which will start by stages from 1Q16 with the whole facility fully operational by 2H16. This could add 1.2mtpa of urea and 740ktpa ammonia capacities.

Changes To Forecasts

No changes to FY16-FY17 estimates.

Rating

Maintain OUTPERFORM

Valuation

We maintain our price target of RM7.50/share, based on 17.3x CY16 PER, which is -0.5SD 3-year mean.

Risks to Our Call

An unexpected lower PU rate while ASP drops sharply.

Source: Kenanga Research - 15 Apr 2016