Monday, April 22

Explosion at Rapid could dampen PetChem’s earnings growth

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The massive explosion at Petronas’ Rapid project could put a dent in PetChem earnings growth, analysts observed.

KUCHING: The massive explosion at Petroliam Nasional Bhd’s (Petronas) Refinery and Petrochemical Integrated Development (Rapid) project could put a dent in Petronas Chemicals Group Bhd’s (PetChem) earnings growth, analysts observed.

Early Thursday morning, a massive explosion and fire occurred at Petronas’ Rapid project.

According to reports, investigations are still underway to determine the cause of the incident.

PetChem, which owns 50 per cent of the Pengerang petrochemical division, was expected to see production commencing in the later parts of the second half of the financial year 2019 (2HFY19) as the division’s mechanical completion has reached 96 per cent.

Back in 2017, PetChem sold a 50 per cent stake in PRPC Polymers to Saudi Aramco for RM3.8 billion (US$900 million).

“Given Petronas’ strict adherence to health, safety and environment requirements, we expect an extensive investigation into the causes of this incident, which could delay the commencement of petrochemical production,” said the research team at AmInvestment Bank Bhd (AmInvestment).

According to AmInvestment, PetChem expected minimal contributions this year from the plant, with utilisation around 70 per cent for the first three to six months which will progressively ramp up to 90 per cent over a time frame yet to be confirmed due to the complexity and integration required with Petronas’ refinery.

“However, if the Rapid investigations defer production next year, we expect a six-month delay to cause PetChem’s FY20F earnings to slightly decline by three per cent, assuming product prices are stable.

“For now, we maintain our forecasts pending further clarity from management,” it added.

Despite the unexpected incident, the research house remained sanguine on the group’s performance this year, given that PetChem’s product prices have a strong correlation to Brent crude oil prices which have risen by 37 per cent since December 31, 2018, to US$71 per barrel currently.

“This will be a greater impact to the group than temporary delays in Rapid commencement as a one per cent increase in average product prices will translate to a higher three per cent rise in net profit,” it pointed out.

“Likewise, our FY19F forecasts have not incorporated any increase in PetChem’s output given that the group has guided that average plant utilisation could remain flattish above 90 per cent, similar to FY16 to FY18.

“This is supported by five major TA activities this year, which will be spread out over 1QFY19 and 3QFY19, as compared with 6 in FY18,” AmInvestment added.

It also maintained its ‘buy’ call on the stock.