Saudi entry spurs sector, but fails to excite stock market

In a filing with Bursa Malaysia yesterday, the group said the utilisation rate of its plants increased to 88% compared with 66% in the corresponding quarter of 2013 with improvement in methane gas supply and utilities supply as well as better plant reliability. Revenue for the fourth quarter climbed 16% to RM3.9bil from RM3.35bil previously. (file pic)

PETALING JAYA: Petronas Chemicals Group Bhd’s (PetChem) partnership with Saudi Aramco bodes well for the Malaysian petrochemical firm. Yet, investors yawned at the news that PetChem had entered into a deal to sell a 50% stake in PRPC Polymers Sdn Bhd to the Saudi Arabian state oil company.

PetChem shares fell one sen to close at RM7.29 yesterday.

The company on Monday announced a share purchase agreement to dispose of a 50% equity interest and shareholder loans in PRPC Polymers to Saudi Aramco for US$900mil cash.

Following the deal, PetChem will be left with a 50% stake in PRPC Polymers, which was acquired in November 2015.

An analyst said the lack of market reaction was due to the absence of the element of surprise.

“This is not a surprising event because Saudi Aramco had already announced early this year that it would be investing in projects in the Petronas Pengerang Integrated Complex in Johor,” the analyst with a local brokerage said.

“The market would have, therefore, priced in the impact early on,” he added.

According to AmBank Research, PetChem’s tie-up with Saudi Aramco in PRPC Polymers would enable the company to lower its risk exposure in Pengerang, Johor, while enabling it to leverage on the expertise of Saudi Aramco.

“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$1bil (RM4.24bil) capital expenditure (capex) still to be spent on this project while securing feedstock supplies, as Saudi Aramco will be selling 70% of PRPC Polymers’ crude needs,” AmBank Research said.

“PetChem could also leverage on Saudi Aramco’s expertise in integrated petrochemical projects, which would open up future strategic joint ventures,” the brokerage added.

AmBank Research noted that the PRPC Polymers stake disposal would likely halve PetChem’s revised capex of US$2.8bil for the Pengerang facilities, excluding the US$443mil isononanol plant, with the likely deconsolidation of PRPC Polymers’ debts as a “joint operation company”.

This is expected to improve PetChem’s net cash position by RM1.5bil by end-December 2017, and this could go to funding alternative projects.

According to PetChem’s annual report, its capital commitment to projects in Pengerang was RM9.3bil for 2016, lower than RM14.46bil in 2015.

AmBank Research has maintained a “buy” recommendation on PetChem, with an unchanged fair value of RM8.35 based on eight times the projected 2018 enterprice value/earnings before interest, tax, depreciation and amortisation.

This is on par with PetChem’s three-year average valuation.

The brokerage has maintained its earnings forecast for PetChem for the financial year ending Dec 31, 2017 (FY17) to FY18.

However, it has lowered PetChem’s earnings forecast for 2019 by 4%, as the potential returns from the commencement of the Pengerang petrochemical operation at the Refinery and Petrochemical Integrated Development project would be cut by half with the entry of Saudi Aramco.

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