This article first appeared in The Edge Financial Daily, on April 18, 2016.
Petronas Chemicals Group Bhd
(April 15, RM6.75)
Maintain neutral with a target price (TP) of RM6.86: Back in November 2013, Petroliam Nasional Bhd (Petronas) and Versalis SpA, Eni SpA’s chemical subsidiary, signed a shareholders’ agreement to set up a joint-venture company that will manufacture, sell and market elastomers produced within Petronas’ Refinery and Petrochemical Integrated Development (Rapid) complex in Pengerang, Johor.
However, Petronas Chemicals Group Bhd (PetChem) is cancelling the elastomer project in Rapid. The projected investment cost of the elastomer plant is approximately US$1.3 billion (RM5.07 billion) out of the total US$3.9 billion estimated for the total investment cost of its polymer, glycol and elastomer projects.
The other two projects (polymer and glycol) will continue according to schedule. The company noted that the cancellation of the elastomer project will result in 350,000 tonnes of capacity reduction per annum out of the total 3.5 million tonnes per annum.
PetChem guided that the decision to cancel the elastomer project was arrived at after taking into consideration the less-than-favourable product market outlook and estimated return on investment of the project. In fact, the company further noted that the cancellation is expected to improve the overall returns of PetChem’s investments in Rapid.
In light of the soft market outlook for certain petrochemical products and continued uncertainty in global crude oil prices, we believe PetChem is taking a very bold and prudent approach in its investment decisions.
Nevertheless, PetChem remains committed to its other projects in Rapid, namely the polymer and glycol projects.
Back in Nov 23, 2015, PetChem, via its unit PRPC Polymers Unit Sdn Bhd, awarded the consortium comprising Tecnimont SpA, Huanqiu Contracting & Engineering Corp, TechnimontHQC Sdn Bhd and TechnimontHQC S.C.A.R.L. an engineering, procurement, construction and commissioning (EPCC) contract for a 900,000-tonne-per-annum polypropylene plant within Rapid worth US$482 million.
Also, back in Dec 4, 2015, PetChem awarded two EPCC projects (polyethylene and glycol) worth a collective US$882 million to the consortium of Samsung Engineering Co Ltd, Samsung C&T Corp and Samsung Engineering (M) Sdn Bhd.
We are maintaining our “neutral” recommendation on PetChem with an unchanged TP of RM6.86 per share as we believe the outlook, fundamentals and stock price performance have improved significantly.
Our TP is premised on a target financial year 2016 (FY16) price-earnings ratio (PER) of 17.5 times pegged to FY16 earnings per share of 39.2 sen.
Our target PER is the company’s average quarterly rolling PER since its listing. It is, however, worthwhile to note that the company’s PER is a premium to its regional competitors’ average PER of only 14.5 times due to the company’s relatively cheaper and more reliable feedstock advantage from Petronas. — MIDF Research, April 15