Petronas Chemicals expanding into new markets with new venture

by **Cals** Fri 11 Apr 2014, 14:31

Business & Markets 2014

Written by Kenanga Research

Friday, 11 April 2014 10:36

Petronas Chemicals Group Bhd
(April 10, RM6.79)
Maintain outperform with target price of RM7.31: PChem announced on April 9 that the board of BASF-Petronas Chemicals Sdn Bhd (BPC), the 40:60 joint venture (JV) between PChem and BASF Nederland BV, has approved the final investment decision (FID) on the RM1.5 billion integrated aroma ingredients complex in Gebeng, Kuantan.

This project, which was announced in April 2013, will be integrated with BPC’s existing facilities located in Gebeng, Kuantan.

The integrated aroma ingredients complex will include a new world-scale plant to manufacture citronellol and L-menthol, and will be developed in phases with the first plant expected to come on stream in 2016.

The new venture is expected to open up new business markets for the gas-based petrochemical company in the flavours, fragrance and pharmaceuticals industries.

Project financing wise, PChem should have no problem as its balance sheet was in a strong net cash position of RM10.16 billion as at December 2013.

Although financial year 2014 ending Dec 31 (FY14) remains challenging due to heavy maintenance activities, it will be less heavy than FY13. We expect overall plant utilisation to improve slightly to 78.4% in FY14 from 77.9% in FY13.

With new FY14 assumptions of 78.4% plant utilisation, ringgit/US dollar exchange rate of 3.25 from 2.83 and oil price of US$102 (RM328) per barrel from US$109, we trim FY14 estimates by 6.7%.

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We also extend our estimates horizon to FY16 with earnings growing by 5% in FY15 on higher utilisation and strong average selling prices (ASP), but FY16 earnings is set to decline 4% on the weaker US dollar and ASP.

The FY15 and FY16 assumptions are: (i) plant utilisation of 80.5%-85.6%; (ii) ringgit/US dollar exchange rate of 3.19-3.15; and (iii) oil price of US$106-US$103 a barrel.

We roll over our valuation base year to calendar year 2015 with an unchanged target price-earnings ratio of 15 times.

Key risk to our call includes a reversal of the current strong exchange rate and a sudden drop in crude oil prices. — Kenanga Research, April 10

This article first appeared in The Edge Financial Daily, on Aprill 11, 2014.