Saudi petrochemical earnings expected to grow to $11 bn in 2014
Higher prices and improved demand outlook are expected to increase the 2014 year-on-year earnings of top 10 Saudi Arabian petrochemical companies to SR42.5 billion ($11.3 billion), NCB Capital, the GCC’s leading wealth manager and the Kingdom’s largest asset manager, said in its forecast on Saudi petrochemical sector in 2014.
The sector will also benefit from contribution from new projects and improved operational efficiency for most of the stocks under coverage, added the end-of-year update on the Saudi petrochemicals sector according to an article in The Saudi Gazette.
“We remain Overweight on SABIC, SIIG, Tasnee, Yansab and Advanced, while maintaining all other ratings. Higher petrochemicals prices driven by improved demand outlook, continued feedstock advantage, new start-ups and operational efficiency are expected to increase 2014 earnings by 21 per cent year-on-year,” said Iyad Ghulam, equity research analyst at NCB Capital.
“We have revised petrochemical demand and price estimates higher for 2014 by an average 11 percent, driven by improving economic conditions in developed and emerging markets. Increasing industrial production, auto sales and housing market in the US and Europe is expected to continue to drive petrochemicals demand.
Moreover, the increase in Chinese exports is expected to mitigate the impact of any softening of the economy.
“We have delayed the expected change of feedstock prices from 2014 to 2015. The natural gas, which is supplied by Aramco at $0.75/mmbtu, was expected to double in 2014. However, no official announcement was made and therefore we postpone the increase to 2015. As a result, 2014 earnings estimates and valuations of most of the ten stocks under our coverage have been revised up by an average of 6 per cent and 1 per cent respectively due to this delay.”
NCB Capital remains Overweight on SABIC, SIIG, Tasnee, Yansab and Advanced, and Neutral on the remaining stocks under coverage. On average, the PTs are up 15 per cent due to higher petrochemicals prices, operational efficiency, start-ups, and delay in revision of ethane prices.
“Our top picks are Tasnee and SIIG. Improved demand and pricing outlook for petrochemicals and TiO2 increase our confidence on Tasnee,” Ghulam noted. “While SIIG‘s valuation remains attractive driven by strong earnings from SCP /JCP, the start-up of nylon 6.6 project and the increase in Petrochem’s earnings will support earnings growth,” he added.
NCB Capital reiterated its Overweight rating on SABIC with a revised PT of SR128.6. The expected improvement in demand and prices, delay in ethane price increase and the improved earnings outlook for Kayan and Yansab has led to a 7 percent increase in 2014E earnings estimates. The higher than expected dividends paid by Yansab and SAFCO also increase the possibility of higher dividends by SABIC going forward. SAFCO
NCB Capital remained Neutral on SAFCO with a revised PT of 152.1. Lower fertilizer prices due to the change in global supply drivers are a key concern in the medium term. This could lead to lower dividends in 2014 and beyond, resulting in a pressure on the stock price. NCB Capital expects urea and ammonia prices to decline by around 6.1 percent and 12.4 percent respectively in 2014.
NCB Capital remained Overweight on Tasnee with a revised PT of SR37.7. Improved demand and pricing outlook for petrochemicals and TiO2 increase the PT by 23.2 percent.
Moreover, new projects are expected to support growth in the long run. With a 2014E P/E of 8.8x (a 33.2 percent discount to the sector), the stock represents an attractive investment opportunity at the current level.
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