Wednesday, May 25, 2011

Pengerang oil and gas complex to benefit Petronas Chemicals

PETALING JAYA: Petronas Chemicals Group Bhd will undoubtedly benefit from parent company Petroliam Nasional Bhd's (Petronas) plan to build a US$20bil integrated downstream oil and gas complex in Pengerang, Johor.

Analysts expect the company to be a key beneficiary, although it has yet to confirm its participation in the project.

CIMB Research said in a report yesterday that the plan would provide great growth potential for Petronas Chemicals, similar to what the latter had achieved at its largest facility at Kertih.

“Although the management has not clearly stated whether it is expanding in Johor, this plan is likely to be an expansion of the new naphtha-based petrochemical complex that the company talked about previously,” CIMB Research said, adding that Petronas Chemicals could invest US$1.5bil to US$2bil in the project.

JP Morgan said in a report this month that the development was positive for Petronas Chemicals as it would provide feedstock for the company to expand its Malaysian capacity further.

“We think this is important because for most Asian petrochemical producers, feedstock availability is the main bottleneck to expanding capacity significantly over the next three to five years.

“The new ethylene capacity would be three times Petronas Chemicals' existing capacity and because it is based on naphtha, it will have the capability to produce profitable products like butadiene as well,” it said.

Petronas Chemicals has previously announced a three-year expansion plan that can add 30% capacity by 2015. The plan includes a downstream expansion to enhance margins, urea and ammonia plants with one million tonnes per annum capacity, and a new naphtha-based petrochemical complex.

The plans were likely to be finalised by next year and should be adequately funded with the company's net cash which stood at RM5bil now, said CIMB Research.

The research house said Petronas Chemicals would report strong fourth-quarter earnings for the financial year ended March 31 (due to be out tomorrow), with a growth of 36% quarter-on-quarter and 34% year-on-year.

The better earnings will be driven by higher margins on all of its products, improved petrochemical product prices (owing to higher oil prices) and a smaller increase in costs, especially ethane cost which is relatively fixed due to contracts.

It maintains an “outperform” call on the stock and said the share price was likely to be re-rated for its strong earnings in the fourth quarter and improved fundamentals, both short term (due to higher oil price and rising volume) and long term (its expansion plans and industry margin improvement post-2011 due to the industry upcycle).

“The stock remains attractive, given its superior growth profile and profitability. We continue to apply a calendar year 2012 EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortisation) of 10 times to the stock, leading to an unchanged target price of RM10,” it said.

Meanwhile, ECM Libra Investment Research said in a report on Monday that Petronas Gas Bhd was an attractive buy with a target price of RM14.14. It implies a 19.4 times price-to-earnings ratio due to potential earnings upside from its liquefied natural gas (LNG) re-gas facility to be ready mid next year in Malacca.

“New earnings would be from transportation and re-gasification service agreement or the agreement alone,” it said.

ECM Libra said with the plant adding some 20% to Petronas Gas' current transportation volumes, net profit could grow by 10% from transportation alone. As for re-gasification charges, revenue from that segment alone would amount to RM330mil based on an estimated price of RM2 per million British thermal units.

OSK Research also said in a report recently that Petronas Gas could be an indirect beneficiary of gas subsidy cuts, given that the move would make it more palatable for Petronas to import LNG via the former's terminal for transmission around Peninsular Malaysia.

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