NCB Capital remains optimistic about the Saudi Petrochemical sector

NCB Capital, Saudi Arabia’s largest investment bank and leading GCC wealth manager, said in a new report issued today that with the long term advantages remaining intact, the Bank believes the KSA petrochemical stocks look attractive at current valuation levels. However, in the near term, concerns on the global economy could lead to weakness in petrochemical prices and demand. This, along with a decline in petrochemical imports into China, could pressure the performance of petrochemical stocks.

Commenting on the new report, Tariq Al-Alaiwat, Equity Research Analyst at NCB Capital said: “Off the back of debt issues in the US and several European countries, concerns are increasing over the likelihood of a “double dip” recession, leading to lower oil demand and prices. This is along with overcapacity concerns post-2012. However, we believe the sector’s low cost structure, rising domestic demand and proximity to growing Asian markets limits the downside risk. Furthermore, we believe that the KSA producers expanding and diversifying production base are key positives.”

NCB Capital expects total net income of the stocks under its coverage to increase by 52% YoY to SR38.5bn, benefiting from the start up of Sahara’s Al Waha facility, the full year earnings from Yansab and Sipchem’s Phase II, and higher petrochemical prices. Saudi Kayan’s production, which is expected to start in 4Q11, would further support the bottom line growth.   

Al-Alaiwat added: “Concerns on the global economy have led to increased volatility in the Saudi stock market. The TASI petrochemical index is down 7% in August 2011. From stocks under our coverage, Sahara is down 12%, Tasnee is down 11% and Sipchem is down 10% in August so far. With limited short term catalysts, we highlight that volatility may remain in the coming few months.”

NCB Capital remained Neutral on Tasnee, Sahara, Nansab, and Petrochem and upgraded Saudi Kayan to Overweight from Neutral due to attractive valuation levels. The Bank’s top picks in the sector were Sipchem with a revised target price of SR25, expecting 2011E revenues to grow 62% YoY to SR3.2bn with a net income of SR636mn, up 68% YoY. Benefiting from its Phase II contribution, NCB Capital believes that increased production capacity and higher petrochemical prices are key growth drivers.

SABIC was also NCB Capital’s top pick keeping its overweight rating on the stock with a revised target price of SR124.3. The Bank believes that at current levels the stock offers an attractive investment opportunity considering its earnings growth potential and expanding production base.

NCB Capital was voted best research house in three categories in Euromoney’s annual Middle East research survey for 2010. The bank achieved a total of 10 ranked positions in this year's survey, the third highest amongst all research firms in the region. On the basis of top ranked positions, the firm achieved the second highest total in the region.

The bank provides analysis on the banks, telecoms, agriculture and food, cement, construction, industrial, petrochemical, consumer goods/retail, and utilities sectors; the only domestically-owned investment bank to offer such a range.