Petronas Chemicals Group Bhd 
(July 22, RM6.58)
Maintain hold with higher fair value of RM6.20 per share from RM5.30 per share previously. Petronas Chemicals Group Bhd (PetChem) announced that the group and Germany’s BASF will jointly build a new world-scale production plant in Kuantan for highly-reactive polyisobutene (HR-PIB). 

The plant is expected to start operations in the fourth quarter of financial year 2017 (4QFY17).

The new plant, which will have an annual capacity of 50,000 tonnes of HR-PIB, will be at the site of their existing joint venture, BASF Petronas Chemicals Sdn Bhd. 

HR-PIB is an important intermediate product for the manufacturing of high-performance fuel and lubricant additives, including additives for sludge prevention.

We understand that the investment is in line with the group’s strategy to diversify into specialty chemicals and solutions. 

Currently, BASF also has production facilities for HR-PIB in Germany, Belgium and China.

We do not expect the new plant to have a significant contribution to the group given that the annual capacity is small compared with the group’s annual production capacity of more than 10 million tonnes.

PetChem’s plant utilisation rate had improved to 90% in 1QFY15, following the completion of a major turnaround and maintenance shutdowns in 2013 and 2014.

However, management expects the plant utilisation to normalise to between 80% and 85%, as there will be planned turnaround activities at two of its plants beginning 2QFY15.

The outlook for the olefins and derivatives market is expected to remain uncertain in the near term, given the uncertainty in crude oil and naphta prices. 

Fertilisers and methanol will also remain challenging due to higher supplies of fertilisers anticipated from China, following changes in its export tax structure.

The Sabah Ammonia Urea plant, which will increase production capacity from 1.4 million tonnes per annum (mmtpa) to 2.6mmtpa, is on track for completion by 1QFY16.

Additionally, PetChem will incur borrowings going forward to fund its future projects, including the Refinery and Petrochemical Integrated Development, with a maximum net debt/earnings before interest, taxes, depreciation and amortisation (Ebitda) level of 2 times.

The stock is currently trading at a FY15 enterprise value/Ebitda of 9.2 times, which is above PTT Global Chemicals’ 7.07 times. — AmResearch, July 22.

This article first appeared in The Edge Financial Daily, on July 23, 2015.