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Petrochem commercial operations to start in Q2 2012


NCB Capital (NCBC) released a new report on Petrochem and expects the company to continue to report losses until Q2 2012 when its petrochemical complex will start operations.

Due to Petrochem's timing of start up, we continue to remain neutral with a revised target price of US$4.5. Increased gross margin estimates and better pricing assumptions have led to an upward revision in our target price.

•Project to start commercial operations in Q2 2012

Petrochem expects its petrochemical complex to start production by the end of 2011. NCBC expects commercial operations will start after another 6-9 months and estimate Petrochem to start generating operating revenues in Q2 2012. 2012E revenues are estimated to be US$1.6bn with a net income of more than US$258mn.

• Net losses in 2011

Since Petrochem is in a pre-operational stage, it is expected to continue to report non-operational losses during 2011. We estimate 2011E net loss to be around US$3.9mn compared to US$11.3mn.

• Petrochem's product mix offers limited growth prospects

Petrochem's sales mix would include polyethylene, polypropylene and polystyrene, out of which polyethylene and polypropylene together accounts for 88 per cent of total sales volumes. NCBC believes these 2 products would face oversupply conditions post 2012E given the ongoing capacity addition in the Middle East and Asia. Oversupply would adversely impact prices starting from 2013E, in turn exerting pressure on Petrochem's margins.

• Remain Neutral

The stock is up 44 per cent over the last 12 months, outperforming the TASI Petrochemical index by 37 per cent. In our opinion, the current stock price factors in all positives associated with the stock and offer little room for further upside. NCBC, therefore, remains neutral on the stock with a revised target price of US$4.5/share. The upward revision in gross margin estimates and pricing assumptions has raised our target price for Petrochem.

•Increased equity risk

Premium to factor in ongoing political instability in the region negatively impacted our valuation. NCBC believes any update on the progress of the project would act as a positive stock price catalyst.