Global Investment House - Saudi Arabia - SABIC - Investment Update- Saudi Basic Industries Corporation (SABIC) has reported after tax profit of SR3.6bn in 3Q2009, a growth of 102.1% over the previous quarter but a decline of 49.6% over the corresponding period last year. During 9M2009 tax after profit declined by 79.3% from SR21.7bn recorded in 9M2008.
We believe that product prices and overall capacity utilization were the key factors for SABIC profitability growth during 2Q2009 and 3Q2009. However, on a 9M2009 basis the prices and capacity utilization are still low compared to the previous year as the financial crisis which started in 4Q2008 stretched into 1H2009 eroding oil prices and end-product demand. However, crude oil prices have recorded upward movement during 3Q2009 from preceding quarter same year. Hence, we have changed our forecast for crude oil prices from US$60.0-65.0 per barrel to US$70.0-80.0 per barrel for the period 2009-12. Consequently, we have also raised our forecast for petrochemical prices.
Based on all the recent updates in our financial model we have revised our fair value upwards to SR83.1. The stock at its current market price of SR80.5 (as on 22nd Nov 09) is trading at a discount of 3.2% to the fair value. We, therefore, recommendation ‘HOLD’ for the stock.
Despite the uncertain economic environment, SABIC is consistently expanding its operational and production activities. Recently, SABIC announced two JVs with SINOPEC and Albemarle Corporation. SINOPEC will have a production capacity of 3.2mn tons of different petrochemical products and is expected to come on line in 1Q2010. Albemarle Corporation will have a production capacity of 6,000 tons of tri-ethylene aluminum (TEA), and is expected to come online in 2012. We believe that the joint venture with SINOPEC is likely to give SABIC the ability overcome entry barriers and deal with competition effectively in the Chinese market. In addition, tie-up with a local producer will give the company the necessary support and knowledge to sail smoothly in the high growth Chinese market. The Chinese JV will increase the overall capacity of the company by 2.8%. Furthermore, long-term sustainable volumetric growth is largely associated with the revival in the world’s major economies, which are the major consumers of SABIC products. The stimulus measures in various countries have managed to jump-start the economies. However, so far the recovery has been “jobless” with unemployment still at historically high levels in many countries. Eventually private sector spending and consumer spending will have to overtake government spending to make economic growth sustainable. Thus, we are assuming a slow economic recovery.
The company is expected to post sales revenue of SR99.5bn in 2009, which is 1.6% higher than our previous forecast. The upward revision in the company’s sales revenue is mainly based on the updated (i) crude oil prices, (ii) capacity utilization and (iii) commencement dates of new capacities in 2010. We have also incorporated the delay in YASNAB plant which is not expected to come online in 2009. We now expect sales revenue to increase at a CAGR of 3.3% during 2009-12 against our previous estimate of negative CAGR of 1.5% during the same period.
Despite the upward revision in sales revenue for 2009, we expect the company to post profitability of SR7.6bn in 2009, a downward revision by SR3.3bn from our previous estimate. The major reasons for such a downward revision are (i) downward revision in other income by SR0.8bn from our previous estimate (ii) expected higher depreciation, which has pushed up our cost of sales estimate by SR1.3bn, (iii) higher minority interest to SR7.1bn from previous estimate of SR6.6bn, (iv) increase in administration and general expenses estimate by SR0.2bn to SR8.9bn from our previous estimate (v) increase in financial cost to SR3.1bn from our previous estimate of SR3.0bn.
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