A RM3.8bil injection for PetChem
Company gets huge capital boost from polymer plant deal with Saudi Aramco
GIVEN the earlier announcement that Saudi Aramco will be investing US$7bil in the Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang, Johor, it did not come as a big surprise when Petronas Chemicals Group Bhd (PetChem) inked a new deal with the state oil company of Saudi Arabia.
This was evidenced by the lack of movement in PetChem’s share price over the past week, despite revealing a deal that will see it gain US$900mil (RM3.8bil) and slash by half its financial burden in constructing a polymer plant in Pengerang.
PetChem announced on Monday that Saudi Aramco would be taking up a 50% stake in its polymers plant for US$900mil (RM3.8bil) and also absorb the proportionate share of borrowings tied to the plant.
The deal will leave PetChem with 50% of PRPC Polymers Sdn Bhd, which it had acquired in November 2015.
Following the announcement on Monday morning, the share price moved from RM7.29 to close only one sen higher at RM7.30 at the end of the day.
In announcing the deal, PetChem had also revealed that the agreement was tied to another agreement involving Saudi Aramco and Petronas announced earlier this year.
In February, PetChem’s largest shareholder, Petronas announced that Saudi Aramco would be taking up 50% equity interest and 50% of the shareholder loans related to the refinery and cracker project in Pengerang.
Under the partnership, the Saudi oil giant will supply up to 70% of the crude feedstock requirements of the refinery, with natural gas, power and other utilities supplied by Petronas.
Both deals, which are inter-conditional, were finalised last week.
It makes sense that the two deals are inter-conditional, as the output from the refinery and cracker project is then used as feedstock for the polymer plant, giving Saudi Aramco participation in the full cycle of production – from the refinery to production of polymer.
However, Petronas did not reveal much else on the refinery and crackers facility deal, particularly on how much Saudi Aramco was forking out for the stake.
So it remains unknown how much the Saudi Arabian oil giant has actually committed to spend in total for the two deals, as well as the liabilities it will take on.
The amount, however, is expected to be far from the initially announced US$7bil planned investment into the Rapid project, which means there are likely to be most announcements of partnerships with Saudi Aramco coming up in the near future.
Another thing to consider is what PetChem is going to do with the US$900mil cash that it is getting from the divestment.
In the announcement, it did not detail how the proceeds of the transaction will be utilised.
Not only will PetChem be sitting on the additional pile of cash, the company will also have its initially planned capital commitment for the polymer plant slashed by half.
Considering this, will the company look at paying out higher dividends to its shareholders? In this sense, its competitor, Lotte Chemical Titan Holding Bhd is attractive to investors due to its 50% dividend payout policy.
For the financial year ended December 31, 2016, PetChem paid out RM1.36bil in dividends, representing about 42.5% of its RM3.2bil profit after tax for the period.
According to its latest annual report, however, PetChem says it targets a payout ratio of about 50% of its consolidated profit after tax. The group has a dividend policy that is subject to the discretion of the board and final approval from shareholders, and takes into consideration factors including its earn- ings, capital requirements, general financial condition, its distributable reserves and other relevant factors, it says in the annual report.
“The board intends to adopt a policy of active capital management. The board proposes payment of dividends through cash generated from the group’s operations after setting aside necessary funding for capital expenditure and working capital needs.
“As part of this policy, the group targets a payout ratio of around 50% of its consolidated profit after tax under Malaysian generally accepted accounting principles (GAAP) in each calendar year, subject to the confirmation of the board and to any applicable law, licence and contractual obligations and provided that such distribution would not be detrimental to the group’s cash needs or to any plans approved by the board,” it says in the report.
PetChem also sits on a fat balance sheet. Based on its most recent financial statement, the company had RM7.58bil in cash and cash equivalents as at June 30, 2017.
This is prior to the latest deal that will see it get RM900mil from the stake sale.
Investors will just have to wait and see whether PetChem will be paying higher dividends to its shareholders following the latest transaction.
On the other hand, it was revealed that PRPC Polymers will be taking on borrowings following the transaction, with PetChem’s portion amounting to RM1.12bil.
It is assumed that Saudi Aramco will taking on a similar amount, seeing as they are 50:50 partners in the venture.
Previously, it is believed that the project has been funded via shareholder advances instead of taking up borrowings.
This is despite the fact that a company like Petronas Chemicals, which is backed by its Petronas as its largest shareholder, could have easily secured its own borrowings.
Banks would have been more than willing to lend to the company, at the most competitive rates, for a huge project such as the Pengerang polymer plant.
Now that it has entered the new partnership and will be taking up debts of its own, all eyes will be on PetChem’s next move, and on whether investors will be receiving higher dividends as the company has indicated.