PCHEM announced that it will, together with BASF, invest aboutUSD500m (MYR1.5bn) to construct an integrated aroma ingredients complex in Gebeng, Kuantan. To be developed in phases, the first plant is only expected to begin operation in 2016. Hence, we make no changes to our FY13-FY15 estimates. Maintain NEUTRAL, with our FV unchanged at MYR6.40, pegged to 12x FY13 EPS.

- USD500m (MYR1.5bn) project. The project will be undertaken by the BASF and Petronas Chemicals Group (PCHEM) joint-venture company,BASF-Petronas Chemicals SB. The facility is intended to cater to demand in Asia Pacific’s growing flavor and fragrance industry. The integrated aroma chemicals complex, when completed, will open a new business frontier for PCHEM to tap into the flavors, fragrance and pharmaceuticals markets.

- Making good use of its RM9.3bn cash pile. As PCHEM only holds a 40% stake in the JV company, its portion for this investment is estimated at MYR600m. We believe that the group will have no issues funding this project given its solid balance sheet. At end-Dec 2012, it has zero borrowings and is sitting on a cash pile of MYR9.3bn.

- No changes to earnings estimate. While this is positive news for the company in the long run, the project will still need to obtain approval from the JV company’s board. If the project is approved, the first plant will only be operational in 2016. Hence, we are making no changes to our FY13-FY15 earnings estimates.

- Maintain NEUTRAL. All in all, we maintain our NEUTRAL recommendation on the stock. Our FV of MYR6.40 is premised on 12x
FY13 EPS, which is at a 30% premium to its peers within the region, which are trading at an average 9x FY13 EPS. The premium is justifiable due to the group’s relatively cheaper feedstock advantage. We advise investors to stay invested in this stock for its attractive dividend yield of 4.1% for FY13 and 4.3% for FY14, assuming a 50.0% dividend payout ratio.

Source: RHB