PetChem’s PRPC Polymers stake sale mildly positive

This article first appeared in The Edge Financial Daily, on October 4, 2017.
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Petronas Chemicals Group Bhd
(Oct 3, RM7.29)
Maintain buy with an unchanged fair value (FV) of RM8.35:
We maintain our “buy” recommendation on Petronas Chemicals Group Bhd (PetChem) with an unchanged FV of RM8.35 per share based on a financial year 2018 (FY18) forecast enterprise value to earnings before interest, taxes, depreciation and amortisation of eight times, on a par with its three-year average. While PetChem’s FY17-FY18 forecast earnings are maintained, we lower FY19 forecast earnings by 4% as the potential returns from the commencement of the Pengerang petrochemical operation at the refinery and petrochemical integrated development will be cut by half.

PetChem recently announced that it had entered into a share purchase agreement to dispose of half of its equity interest and shareholder loans in PRPC Polymers to Saudi Aramco’s wholly-owned Aramco Overseas Holdings Cooperatief UA for US$900 million (RM3.82 billion) cash. This divestment at cost, which will not lead to any significant gain or loss, is not surprising given the announcement earlier this year that Saudi Aramco would be investing in a 50% stake in Petronas Refinery and Petrochemical Corp Sdn Bhd, which is based in Pengerang, Johor. As the disposal will roughly halve the group’s revised capital expenditure (capex) of US$2.8 billion for the Pengerang facilities, excluding the US$443 million isononanol plant, with the likely de-consolidation of PRPC Polymers’ debts as a “joint operation company”, we expect PetChem’s net cash position to improve by RM1.5 billion by end-FY17, which could fund alternative projects.

We are mildly positive on this development as PetChem will be diversifying its risk profile with a lower equity stake in PRPC Polymers and the over US$1 billion capex still to be spent on this project while securing feedstock supplies as Saudi Aramco will be selling 70% of PRPC Polymers’ crude needs. PetChem could also leverage Saudi Aramco’s expertise in integrated petrochemical projects, which also opens up future strategic joint ventures. For the rest of the year, the group’s product prices are likely to improve with the Brent crude oil price trading above US$50 per barrel. This has a close correlation with olefins and derivatives vis-à-vis flat quarter-on-quarter naphtha and urea prices in the second quarter of FY17.

Nevertheless, we expect PetChem’s earnings outlook for the second half of FY17 to be stable on flattish production volume as the ramp-up of the 1.2 million-tonne-capacity SAMUR could be largely offset by plant turnaround activities for the existing Optimal Glycols, ammonia and methanol plants, which could cause the overall utilisation rate to drop to below 90%. — AmInvestment Bank, Oct 2