PETALING JAYA: Integrated chemical producer Petronas Chemicals Group Bhd
(PetChem) is seen to benefit from the rise in feedstock prices, due to the conflict in the Middle East that has resulted in the closure of the Strait of Hormuz as well as attacks on energy infrastructure critical to feedstock production.
CGS International Research (CGSI Research) has raised the company’s price to book value (P/BV) target multiple to 1.4 times from 1.2 times to derive a new target price for the stock at RM6.58 from RM5.56. It has also maintained an “add” call to the stock.
“Potential re-rating catalysts include a longer-than-expected closure of the Strait of Hormuz, which may cause severe feedstock shortages for PetChem’s naphtha-based competitors and create conditions for a parabolic increase in selling prices,” it said.
The research house applied the midpoint of a target range for P/BV based on the stock trading at a historical P/BV of between 1.2 times and 1.7 times in the financial year ended Dec 31, 2023 (FY23).
“This is because our FY26 core net profit forecast has been raised from RM1.5bil to RM2.2bil, which stands in between FY23’s RM1.6bil core net profit and FY22’s RM6.1bil core net profit,” it pointed out.
CGSI Research noted that the average P/BV multiple since 2019 has been slightly higher than 1.5 times and the share price may trade to this P/BV in the future if the ongoing war reorders petrochemical industry fundamentals, including significant culling of capacities (especially naphtha-based petrochemical production capacities) and significant cancellation or postponements of China-based expansion projects.
“If this happens, the current petrochemical upcycle triggered by the war in Iran could have longer-lasting effects, rather than to be confined to the six-month period from April to September 2026, which is the basis of our current FY26 to FY28 earnings forecasts for PetChem,” it said.
The ongoing closure of the Strait of Hormuz has prevented 30% of the global urea production from being exported and this has led to a 47% increase in urea selling prices in South-East Asia to US$720 a tonne, a level that may not go down due to attacks on energy infrastructure.
Liquefied natural gas infrastructure key to urea production may be offline for longer and provide a feedstock cost boost to urea selling prices, which would spillover to higher average fertiliser and methanol selling prices (a rise of 40% year-on-year compared to 25%) for PetChem in FY26.
CGSI Research believes there could be further upside for polyethylene polymer selling prices following the rise in price to US$500 per tonne from US$450 from global production cuts due to lower exports of crude oil and naphtha from the Middle East. This would benefit PetChem’s olefins and derivatives business.
