With the long term advantages remaining intact, Saudi Arabian petrochemical stocks look attractive at current valuation levels, said a new report.

However, in the near term, concerns on the global economy could lead to weakness in petrochemical prices and demand, added the report released by NCB Capital, Saudi Arabia’s largest investment bank and leading GCC wealth manager.

This, along with a decline in petrochemical imports into China, could pressure the performance of petrochemical stocks, the report 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,” said Tariq Al-Alaiwat, equity research analyst at NCB Capital.

“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,” he added.

NCB Capital expects total net income of the stocks under its coverage to increase by 52 per cent year-on-year (YoY) to SR38.5 billion ($10.26 billion), 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 the fourth quarter of 2011, would further support the bottom line growth, the report said.

“Concerns on the global economy have led to increased volatility in the Saudi stock market. The TASI petrochemical index is down 7 per cent in August 2011,” said Al-Alaiwat.

“From stocks under our coverage, Sahara is down 12 per cent, Tasnee is down 11 per cent and Sipchem is down 10 per cent 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 per cent YoY to SR3.2 billion with a net income of SR636 million, up 68 per cent 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 report said that at current levels the stock offers an attractive investment opportunity considering its earnings growth potential and expanding production base. – TradeArabia News Service