IPO ... Petronas Chemical

1.        The retail shares will be offered at RM5.05 per share or 97% of the final institutional price;

2.        At the retail price of RM5.05, the historical price-earnings ratio (PER) for Petronas Chemicals works out to be about 16 times. In comparison, Titan is trading at a PER of 13 times;

3.        The Employees Provident Fund and Kumpulan Wang Persaraan will be cornerstone investors in the IPO, buying a combined 445 million shares

The earnings of the petrochemical group declined in its two previous financial years. But this is seeing a sharp reverse in the current year of operations, which ends March 31, 2011.

Petronas Chemicals’ net profit dived 25% to RM3.4 billion for FY2009 ended March 31, from RM4.6 billion the previous year. Profits fell another 25% to RM2.6 billion in FY2010. Revenue also slipped by 4% and 1% to RM12.4 billion and RM12.2 billion respectively for FY2009 and FY2010.

Nonetheless, Petronas Chemicals’ net profit for the four months ended July 31, doubled to RM938 million from RM587 million for the previous corresponding period.

It is uncertain as to what brought about the stronger showing for the first four months of FY2011 and if the improvement in earnings is sustainable.

However, the earnings of Petronas Chemicals is in line with overall industry trends. For instance BASF SE, the world’s leading chemical company, also saw a large drop in earnings of 52% in FY2009 ended Dec 31. But for 3QFY2010 ended Sept 30, the group’s sales went up by 23% while its net profit more than quadrupled.

Meanwhile an inkling of its performance can be found in its parent company’s recent results briefing. In the briefing in Oct 2010, Petroliam Nasional Bhd (Petronas) alluded the decline in the earnings of its chemical division was mainly due to lower average selling prices although there was an increase in sales volume during the period.

There is no real local comparison for Petronas Chemicals. The closest is Titan Chemical Corp Bhd which is on its last leg of being delisted.

Titan posted a net profit of RM537.8 million for FY2009 ended Dec 31 from a net loss of RM270.3 million in FY2008, indicating the degree of volatility in the industry.

In Titan’s FY2009 annual report, the company said the delay of new capacities, mainly from the Middle East and China, entering the market in 2009 favoured the supply-side which helped the industry to achieve better than expected profitability.

However, Titan noted that numerous mega plants in the Middle East and China are being started up and it anticipates a situation of excess petrochemical capacity which could continue until 2013. Additionally, Titan said most of the Middle Eastern producers enjoyed favourable feedstock advantages.

Upon listing, Petronas Chemicals is targeting a dividend payout ratio of 50% of net profit.

Petronas Chemicals is offering 2.48 billion shares under its initial public offer (IPO), or a 31% stake of the enlarged group. This consists of 1.78 billion existing shares and the remaining 700 million new shares. The retail shares will be offered at RM5.05 per share or 97% of the final institutional price.

Of the 1.78 billion shares offered for sale, 1.5 billion shares will be offered to Malaysian and foreign institutional and selected investors including approved bumiputera investors while the remaining 293 million shares or only 3.7% will be offered to the public and eligible Petronas directors and employees.

Based on the eight billion shares to be listed, including the new shares to be issued, the total market capitalisation will be about RM40.4 billion.

At the retail price of RM5.05, the historical price-earnings ratio (PER) for Petronas Chemicals works out to be about 16 times. In comparison, Titan is trading at a PER of 13 times.

According to reports, the Employees Provident Fund and Kumpulan Wang Persaraan will be cornerstone investors in the IPO, buying a combined 445 million shares.

Petronas Chemicals expects to raise some RM3.5 billion from the listing exercise which will mainly be used for the expansion of its business and synergistic-growth acquisitions for the next five years. It would continue to be on the lookout for strategic acquisitions domestically as well as abroad as part of its expansion plans.

The group also intends to consolidate its petrochemicals activities to increase the efficiency and profitability of its operations. A total of 22 petrochemicals-related companies were combined to form Petronas Chemicals.

Petronas Chemicals will also look to expand its production capacity via plans to develop a Greenfield ammonia and urea production facility that will be supplied with natural gas feedstock available off the coast of East Malaysia. With the increase in capacity, the group is also looking to increase its sales abroad.

Added up, Petronas group’s six units listed on Bursa Malaysia are MISC Bhd, Petronas Dagangan Bhd, Petronas Gas Bhd, KLCC Property Holdings Bhd, MMHE & Petronas Chemical. The group may look into the listing of its other divisions next year (2011).

The petrochemical group is expected to be listed on Nov 26 2010.