Fuelling Consumption Growth of Petrochemicals in Asia. Everyday, we use petrochemicals.

In the morning, we use soap and shampoo when we take a shower. In the afternoon, we are given food packed in a plastic container for our lunch takeaways. In the evening, we enjoy a nice stroll at the garden. If we look around, fertilizers are used to grow flowers and trees in the garden. These are just a few examples of how we consume petrochemicals on a daily basis.

As I write, Petronas Chemicals Group Bhd (PCG) is the largest integrated producer of petrochemicals in Malaysia and among the largest in Southeast Asia. Listed on 26 November 2010 on Bursa Malaysia, Petronas Chemicals Group Bhd is one of the five stocks where its major shareholder is PETRONAS, the national custodian of oil and gas assets in Malaysia. Here, I’ll cover seven key takeaways of PCG before investing into it. Other PETRONAS subsidiaries include PETRONAS Dagangan Berhad (KLSE:PETDAG) and Petronas Gas Berhad (KLSE:PETGAS).

#1: Stock Symbol

1

Ticker Symbol: KLSE:PCHEM / KLSE: 5183

Market Cap: RM 57.4 Billion (25 August 2017)

Share Price: RM 7.18 (25 August 2017)

Industry: Industrial Products

Syariah Compliant: Yes

#2: The Business

Presently, Petronas Chemicals Group Bhd operates a number of world-class production sites which include the Kertih Integrated Petrochemical Complex in Terengganu and the Gebeng Integrated Petrochemical Complex in Pahang. Petronas Chemicals Group has other production sites located at Gurun in Kedah, Pasir Gudang in Johor, Bintulu in Sarawak, Sipitang in Sabah and Labuan.

In total, Petronas Chemicals Group Bhd has a production capacity of 10.8 Million metric tonnes per annum (MTPA) of petrochemicals. Plant utilisation in 2016 was 96% as it has produced 10.4 Million MTPA of petrochemicals in that financial year. It was the highest recorded since its listing in 2010. Its operations are separated into two main categories. They are:

  1. Olefins & Derivatives

    Petronas Chemicals Group Bhd produces a wide range of olefins and derivatives from 11 plants with production capacity of 4.9 Million MTPA. Key products include ethylene, propylene, Monoethylene Glycol (MEG), and Diethylene Glycol (DEG). In 2016, this division has generated RM 9.74 Billion in revenues, accounting for 70.3% of PCG’s group revenues. From which, it made RM 2.16 Billion in segmental profits.

  2. Fertilisers & Methanol

    Petronas Chemicals Group Bhd produces a wide range of fertilisers & methanol from 5 plants with production capacity of 5.9 Million MTPA. Key products include methanol, ammonia and urea. In 2016, this division has generated RM 4.06 Billion in revenues, accounting for 29.3% of PCG’s group revenues. From which, it made RM 999 Million in segmental profits.

#3: Growth Plans

Petronas Chemicals Group is strategically located in Asia Pacific. It is a fast growing region with the continuous rise in population, urbanisation, and level of affluence. This had translated into greater demand for food, personal care products, packaging, textiles, and transportation. All of the mentioned above are key factors that have driven demand for petrochemical products.

As such, Petronas Chemicals Group has an advantage over other global petrochemical players located at Jubail in Saudi Arabia and Houston in the United States as PCG is located close to key growth markets in Asia Pacific. In 2016, PCG has derived 67% of its group revenues from the overseas market across Asia Pacific. This includes China, Indonesia and Thailand where they have contributed RM 3.01 Billion, RM 1.90 Billion and RM 1.39 Billion in sales respectively.

Today, Petronas Chemicals Group intends to cement its market leadership in the regional markets, leverage on economies of scale and drive greater margins from value-added products. These initiatives would serve as a buffer against the cyclicality and volatility of the petrochemical industry.

Thus, Petronas Chemicals Group is embarking on several projects to expand its production capacity. They include the SAMUR project, the Aroma Ingredients Project, 2-EH Acid Project, the HR-PIB project and involvement in the RAPID project at the Pengerang Integrated Complex in Johor. Upon completion, PCG will expand its portfolio of products from 29 presently to 44 by 2020 and will increase its production capacity from 10.8 Million MTPA in 2016 to 16.0 Million MTPA by 2020.

#4: Risks

Petronas Chemicals Group is candid in discussing potential risks and its risk management policies. For instance,

  1. Price Volatility

    The petrochemical industry is a cyclical industry and product prices are volatile as they are influenced by market demand and supply. The recent decline in crude oil prices has affected prices of petrochemical products. Operational excellence is important to ensure cost competitiveness against its competitors.

  2. Plant Disruptions

    Several key factors may contribute to disruptions in plant operations. They include disruptions in obtaining the supply of utilities and feedstock and deficiencies in both hardware and software equipment. As such, Petronas Chemicals Group has initiatives to prolong the lifespan of its assets. They include regular inspections, maintenance, audit, assurances, and close collaboration with suppliers of utilities and feedstock.

  3. Health, Safety, and Environment (HSE)

    PCG is involved in complex manufacturing processes and handling of hazardous chemicals. Continuous efforts in Process Safety Management (PSM), HSE governance and communication to all staffs and contractors are implemented to prevent major HSE incidents in Petronas Chemicals Group which could negatively impact people, assets and environment.

#5: Valuation

As at 25 August 2017, Petronas Chemicals Group is trading at RM 7.18 a share. Based on 2016 Earnings per Share (EPS) of RM 0.367, ts current P/E Ratio works out to be 19.56. As at 30 June 2017, PCG has reported having RM 3.469 in net assets a share. Thus, PCG’s current P/B Ratio works out to be 2.07. For the financial year 2016, Petronas Chemicals Group has declared and paid out RM 0.19 in Dividends per Share (DPS). If it maintains DPS of RM 0.19 in the financial year 2017, its expected dividend yield is 2.65% a year.

#6: Investor Relations

For further enquires on PCG’s Investor Relations matters, please contact:

Edward Ong Hock Soon

Investor Relation Department

Telephone: +603-2392 0747

Email: edward.ong@petronas.com.my

#7: Major Shareholders

As at 17 February 2017, the top three shareholders of Petronas Chemicals Group are:

– Petroliam Nasional Bhd – 64.35%

– Employees Provident Fund Board – 9.95%

– Amanah Saham Bumiputera – 3.33%

What Do You Think Of Petronas Chemicals Group As An Investment? Will You Invest In it? Share Your Views Below

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ian’s personal capacity. It does not in any way represent those of his employer and other related entities. Ian does not own any companies mentioned.

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