• Keep BUY and MYR12.21 TP, 22% upside with c.4% FY22F yield. Our TP is pegged to 9x FY23F EV/EBITDA (5-year mean) with a 2% premium above the intrinsic value based on Petronas Chemical’s ESG score of 3.1. While we acknowledge the rationale for the Perstorp acquisition – to strengthen PCHEM’s petrochemicals portfolio and diversify into specialty chemicals – we are watchful over the sustainability of record-high earnings, which would otherwise suggest higher forward valuation if the price turns, given Perstorp’s volatile earnings track record over the past five years.

• PCHEM is looking to acquire 100% in Perstorp for a base purchase price of EUR1.54bn (c.MYR7.02bn) to be satisfied wholly in cash from Financière Forêt, which is indirectly owned by European private equity firm PAI Partners. Perstorp is a Sweden-based niche specialty chemicals company that develops sustainable solutions for resins and coatings, engineered fluids, and animal nutrition. It has seven manufacturing sites and three R&D centres worldwide. The transaction is slated for completion by 2H22 – pending shareholders’ approval at an EGM and anti-trust clearances in certain jurisdictions. Post the acquisition, PCHEM is still estimated to remain at a net cash level of c.MYR7bn (end FY21: MYR14bn).

• Rationale. The acquisition will enable PCHEM to strengthen its petrochemicals portfolio (adding 2.3mtpa or 18% to its production capacity excluding Pengerang Integrated Complex or PIC) and selectively diversify into derivatives and specialty chemicals. Perstorp’s focuses (see above) represent faster-growing market segments within the industry. In FY21, 52% of sales were derived from Europe, the Middle East, and Africa. This was followed by Asia-Pacific (26%) and the Americas (22%). The existing supply of chemical/intermediates feedstock may support backward integration and create additional upside potential.

• Fair valuation? The implied trailing 12-month EV/EBITDA of 8.3x is below the 10.9x average multiple of comparable transactions in Europe and North America’s speciality chemical industry over the past 10 years – these are in the range of 6.9-15.7x. It is also in line with the listed industry peer average of 8.1x. While Perstorp’s revenue have been in the range of MYR4.2-6.5bn in FY17-21(c.18-28% of PCHEM’s FY21 revenue), its profitability over the past five years has been volatile. The firm was in net losses in FY17 and FY19, and recorded minimal profits in FY18 and FY20. It was only in FY21 that Perstorp achieved its record EBITDA and profit of MYR473m (6% of PCHEM’s core earnings) on improved margins amidst favourable ASPs. Therefore, the long-term sustainability of earnings could be questionable.

• We maintain our earnings estimate pending further management clarification. Downside risks: Weaker-than-expected petrochemical prices and plant utilisation rates.

Source: RHB Research - 18 May 2022