Long-term positive seen for Pengerang due to location


21 Feb 2019

Source: The Edge Financial Daily

 

Oil and gas sector

We are long-term positive on Pengerang due to its strategic location and availability of vacant land. The Pengerang Integrated Petroleum Complex (PIPC) phase 2 development which potentially involves foreign international petrochemical players could kick-start by 2020. Dialog Group Bhd (not-rated) will continue to be one of the key beneficiaries of the Pengerang development due to its exposure to the Pengerang Deepwater Terminals (PDT) by Dialog, Pengerang LNG two (PLNG2), engineering, procurement, construction and commissioning (EPCC) and maintenance services. With the Pengerang Interated Complex (PIC) overall at 97% completion, we see further diversification opportunities for Petronas Chemicals Group Bhd (PetChem) into derivatives and specialty chemicals. Additionally, plant maintenance jobs would be up for grabs for local services players such as Dialog and Serba Dinamik Holdings Bhd in the next two years.

The entire PIPC development will be split into five phases on 22,904 acres (9,269ha) of land. Phase 1 is in the midst of development and 10,642 acres of land have been taken up, comprising: i) PIC by Petronas (6,239 acres); ii) PDT) by Dialog (1,300 acres); iii) Pengerang Industrial Park by Johor Corp (1,192 acres); iv) Pengerang Eco-Industrial Park by Serba Dinamik (68 acres); v) Sungai Rengit Industrial Estate (170 acres); and vi) Pengerang Maritime Industrial Park by Benalec Holdings Bhd (1673 acres). We understand that Johor Petroleum Development Corp Bhd is in talks with different investors on phase 2 development involving 1,899 acres of land, which will likely kick-start in 2020. This will provide further investment opportunities for international petrochemical players to expand their footprint in Malaysia, which is in line with PIPC’s aim to become an international petrochemical hub.

PIPC is strategically located adjacent to existing major international shipping lanes. The water depth of 24m enables very large crude carriers (VLCC) and ultra large crude carriers (ULCC) to berth at the jetties. Phase 1 development will provide feedstock availability and infrastructure and utility readiness for investors, potentially lowering the cost of setting up business and operating expenses. Furthermore, pioneer status and investment tax allowance would provide additional incentives for companies investing in manufacturing in Malaysia subject Petronas LNG2. to several pre-conditions.

As PIC’s fabrication works are almost done and some are at the commissioning stage, plant and facilities maintenance works will increase in the next two years. We reckon that Petronas will eventually award longterm contracts to local services players with job prospect estimated at RM2 billion to RM5 billion per annum (pa) in the future. Established maintenance players with a business presence in Johor such as Dialog (not-rated) and Serba Dinamik (not-rated), in our view, are preferred. Undoubtedly, Dialog will continue to be one of the key beneficiaries of Pengerang’s development due to its exposure in tank terminal business in PDT, PLNG2, EPCC and maintenance services. We will also add its existing capacity by another 1.78 million tonnes pa or 14% by the second half of 2019 with the completion of petrochemical plants. Further diversification opportunities into derivatives and specialty chemicals may be new catalyst to PetChem on the back of a strong balance sheet (net cash position of RM9.4 billion as of 3Q18).

As of 31 Dec 2018, PIC achieved overall progress of 97%. While the Petronas-Saudi Aramco jointly owned refinery has achieved crude chargein to crude distillation unit in October and the steam cracker has achieved mechanical completion, the petrochemical plants (50%-50% owned by PetChem and Saudi Aramco) are at 93% completion and will commence its operation in the second half of 2019. Saudi Aramco has also committed to supply 50%- 70% of the crude feedstock. — Hong Leong Investment Bank, Feb 20