Efficiency, lower costs to drive Saudi petchem sector earnings
Updating its report on Saudi Arabia's petrochemicals sector, NCB Capital, the GCC’s major wealth manager and the Kingdom’s largest asset manager, has downgraded Saudi International Petrochemical Co. (Sipchem) and Sahara Petrochemical Co. to Neutral while maintaining all other ratings, remaining overweight on Saudi Basic Industries Corp. ( SABIC), Saudi Industrial Investment Group (SIIG), Yanbu National Petrochemical Company (Yansab) and APPC.
"The continued subsidy on feedstock costs, expansion in valuation multiples and lower risk premium has increased our price targets by an average of 6 percent," said Iyad Ghulam, equity research analyst at NCB Capital. "However, the slow global economic recovery and subsequent impact on petrochemical demand remains the sector’s key concern." The update downgrades Sipchem and Sahara to Neutral from overweight off the back of the recent rally in stock prices. Sipchem is up 17.3 percent, while Sahara is up 10.7 percent since NCB Capital’s last update in March 2013 compared to a 7.7 percent increase in TASI. However, progress in the ongoing merger talks between Sahara and Sipchem is a key catalyst in the near term. Due to the lack of clarity, NCB Capital has not incorporated this into its model.
"We maintain our overweight ratings on SABIC, SIIG, Yansab and APPC, and our neutral ratings on Saudi Arabia Fertilizers Co. (SAFCO), Saudi Kayan Petrochemical Company, Tasnee and Petrochem," Ghulam added. "Our top picks are SABIC and Yansab. Despite its strong growth outlook, SABIC has lagged the market rally while the strong dividend outlook is the key catalyst for Yansab." Ghulam said: "We have postponed the expected price hike of feedstock to January 2014 from Q2 2013. Although initially planned for the beginning of 2012, we now believe the Ministry of Petroleum and Mineral Resources will not announce a feedstock price hike in 2013. This delay has positively impacted our valuations on SABIC, Sipchem and SAFCO by an average of 1-2 percent while operating income increased by an average of 7 percent for 2013." NCB Capital expects the total net income of the 10 stocks under coverage to increase 15.2 percent YoY to SR 38.3 billion in 2013 (against a decline of 18.5 percent YoY in 2012). The updated price targets are up by an average of 6 percent mainly driven by lower feedstock cost (a delay in ethane price hike and continued decline in propane prices), improved operational efficiencies, and lower risk premium and multiples expansion. In 2014, the expected improvement in demand and higher earnings from startups are expected to increase net income by 8.5 percent YoY to SR 41.5 billion despite the expected decrease in ethane subsidy.