Discontinuing vinyl business will result in initial loss for PetChem


By LIZ LEE
  • Business
  • Wednesday, 31 Oct 2012

PETALING JAYA: With the discontinuation of its vinyl business, the short-term blow to its earnings would be a necessary evil for Petronas Chemicals Group Bhd (PetChem) to bounce back with better business integration in the future.

Analysts covering the group shared a consensus view that the negative impact expected from PetChem's business streamlining would be temporary and that over the longer term, the group's earnings would recuperate.

Kenanga Research said the exercise was expected to “impact PetChem's earnings negatively in the near term but the outcome should be positive in the longer run as the group could focus on its other high margin products that are more closely integrated within its product value chain”.

Kenanga analyst Teh Kian Yeong added: “This will reduce our financial years 2013 to 2014 estimated earnings by around 6% as the business volume will fall by 5%.”

PetChem announced on Bursa Malaysia on Monday that it planned to discontinue its vinyl business, comprising two plants in Malaysia and one in Vietnam, effective Jan 1, 2013, as part of its portfolio optimisation.

The group is expected to record a charge of about RM560mil in the fourth quarter of its financial year 2012, relating to decommissioning, site remediation, provision for contract termination dues and impairment expenses.

Another analyst who wished to retain anonymity called the impact a “one-off thing which will be exceptional to this year only”.

“We should look at next year it should be positive for PetChem because this (vinyl) business has not been showing returns,” he said.

He noted that while PetChem did not want to disclose details on how its vinyl business had been performing to date due to confidentiality issues, he recalled the plant in Malaysia made losses in the last nine months of 2011. “And the Vietnam operations probably had more losses.”

The analyst said the group had been looking to re-evaluate its businesses and optimise its value chain since it went listing. “This looks like a continuation of that strategy.”

RHB Research, in its report, echoed the opinion of slightly weaker revenues in the near term.

“The discontinuation would result in slightly weaker revenues given that the vinyl business production capacity of 680,000 tonnes per annum accounts for 6% to 7% of PetChem's total production capacity.”

It said: “However, in the long run, as it allows PetChem to divert its ethylene feedstock to the production of higher margin products, such as glycols, which we believe could cover the loss of revenue from the polyvinyl chloride (PVC) business.”

Post-earnings revision, RHB Research downgraded its call on PetChem to “underperform” from “market perform”.

MIDF Research reduced its expected financial year 2012 earnings by 11.1%, factoring in the expected charge to be recorded in the fourth quarter. Its revised expected net profit is RM3,104mil for the year.

The research house maintained its “neutral” stance on PetChem with a target price of RM6.68 per share on a forward price to earnings ratio of 14 times, a premium to its global peers' average of 10 times.

“We expect PetChem's third quarter results to fall within expectations with no earnings surprises except this charge to be booked in the fourth quarter,” it said in a report.

PetChem will initiate a divestment process for the sale of its 93.1% interest in the Vietnamese PVC plant while the Malaysian plants will commence their decommissioning activities after January next year.

The process will likely take two to three years to complete.

Its vinyl business manufactures and sells two key products vinyl chloride monomer (VCM) and PVC. From the discontinuation of this business, the group will close three plants, namely the VCM and PVC plants in Kertih Integrated Petrochemical Complex and a PVC plant in Vung Tau, Vietnam.

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