Perstorp acquisition to bolster Petchem earnings

JAYA: PETRONAS Chemicals Group Bhd’s (Petchem) acquisition of Perstorp Holding AB from Financière Forêt SARL will boost the group’s earnings and environmental, social and governance (ESG) standards.

In a report, TA Research noted that Perstorp’s boost to earnings was underpinned by the group’s targets to expand Perstorp’s capacity by 10% in the next two to three years along with its intention to replicate its business and operations in South-east Asia (SEA) and from the removal of the interest cost drag following the settlement of Perstorp’s high borrowings.

The research house believes the replication of its business in SEA will result in cost synergies from backward integration with Petchem’s existing operations, while Petchem thinks there is a vast untapped market potential in SEA for Perstorp’s products.

To recap, in May 2022, Petchem proposed the acquisition of the entire equity interest in Perstorp valued at Rm10.5bil and the acquisition was targeted to be completed early next month.

Perstorp, which has over 140 years of experience, is a leading specialty chemicals innovator that gives pro-environment solutions, focusing on the resins and coatings, engineered fluids and animal nutrition.

Currently, 52% of Perstorp’s net sales comes from Europe, the Middle East and Asia, while 26% is from Asia Pacific, and the remaining from the United States, according to the report.

Bear in mind, the group has not explored the SEA market as of now.

TA Research noted that Perstorp, over the past five years, has made better earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of about 15% to 20%, compared with SEA’S naphtha-based petrochemical producers that has an estimated Ebitda margin of 7%, owing to the company’s ability to pass on higher costs to customers given its niche operations.

TA Research noted that Petchem’s ESG profile was enhanced by Perstorp’s pro-environment solutions (PES) products which have reduced carbon dioxide (CO2) emissions, and thus have lesser environmental impact.

Moreover, selling prices of PES products are typically 10% to 15% higher than the conventional products. The group also enjoys relatively higher margins for PES products.

With the growing demand for sustainable products, Perstorp saw 69% year-on-year growth for the pro-environment portfolio.

“Petchem’s customers are evolving to be more environmentally conscious. As such, they are increasingly prioritising renewable-based products,” TA Research said.

Perstorp plans to produce sustainable methanol at its Stenungsund site in Sweden to be used as feedstock for chemical production.

Under the group’s “Project Air”, it plans to produce 200,000 tonnes per annum of sustainable methanol using circular production methods for the feedstock.

This project aims to reduce carbon emissions by up to 500,000 tonnes per annum.

Petchem is also committed to ESG, as it is at the initial stages of developing its own version of eco-friendly products, with investments in technology that enables direct conversion of biomass to a renewable product.

Other efforts include aiming to convert end-of-life plastic waste into pyrolysis oil or naphtha.

Since the acquisition is to be completed by the fourth quarter of 2022 (4Q22), TA Research incorporated two months of contribution from Perstorp in its financial year 2022 (FY22) earnings estimate, increasing it by 1%.

“This excludes the estimated gross transaction costs of Rm140mil,” it said.

For FY23 and FY24, TA Research expects Petchem’s earnings to get a boost of 15% and 16%, respectively.

It has maintained its “hold” call on Petchem but increased its target price by 29 sen to RM9.19 per share. The stock closed at RM9 yesterday.