Weak global demand and increasing supply is restricting price growth in Saudi Arabia’s petrochemical sector, said NCB Capital, a leading wealth manager and the kingdom’s largest asset manager.

Operational inefficiencies at the new startups are also contributing to the weak performance, the NCB Capital report highlighted.

Commenting on the new report, Iyad Ghulam, Equity Research Analyst at NCB Capital said, “In this update, we upgrade Petrochem to Neutral while we remain Overweight on Sipchem, Sabic, Sahara and SIIG.”  

Total net income of the Saudi petrochemical sector dropped 19.1 per cent year-on-year (YoY) to SR9.1 billion ($2.42 billion) in the third quarter of 2012 on the back of increased feedstock costs and lower petrochemical prices.  On a quarter-on-quarter (QoQ) basis, the sector’s total net income grew 25.7 per cent mainly due to increased sales and other income.

In the fourth quarter of 2012, demand is expected to remain weak which will result in flat petrochemical prices QoQ. Demand in the key end markets (Asia and Europe) continue to report slow growth. TiO2 prices started to decline, driven by weak demand and destocking by buyers. As a result, Tasnee is expected to report weak earnings in the fourth quarter of 2012.

“We estimate Petrochem to continue to report losses in Q4, despite starting commercial operations in October 2012, as shutdown will be extended till January 2013 for technical issues. Saudi Kayan’s operational inefficiency is also expected to persist,” said Ghulam.

NCB Capital expects the total net income of the ten stocks under coverage to decline by 17.6 per cent YoY to SR33.6 billion in 2012 mainly driven by the weakness in petrochemical and TiO2 demand and selling prices.

In 2013, net income is expected to increase by 18.2 per cent due to the contribution from Petrochem, net income from Saudi Kayan and the startup of several new projects. However, prices are expected to decline slightly driven by weak demand from key markets. Despite the short term uncertainty, the sector's long term growth is strong, supported by a strong project pipeline and feedstock cost advantage.

In the report, NCB Capital upgraded Petrochem to Neutral. “Despite the latest extended shut down, we believe all the negatives are already priced in and the company offers a promising earnings growth in the long run. The company is down 11.8 per cent over the past three months vs. the TASI which is down 5.3 per cent. We expect 2013 P/E of 10x, falling to 8.9x in 2014,” explained Ghulam.
 
“NCB Capital maintains its Overweight ratings on Sipchem, Sabic, Sahara and SIIG, and our Neutral ratings on SAFCO, Saudi Kayan, Tasnee, Yansab and APPC. Our top pick is Sabic; we believe the stock has a well diversified product mix, a strong product pipeline, low production cost and good dividend yield,” added Ghulam.

In the report, NCB Capital updated the price targets for the stocks under coverage. Tasnee and Kayan price targets are down sharply while others broadly unchanged.

“The majority of price targets are down 1 to 6 per cent due to expected margin pressure and shutdowns. However our price target of Tasnee is down 19.1 per cent due to a negative TiO2 outlook. Our price target of Saudi Kayan is down 16.5 per cent due to continued weakness in operational performance,” concluded Ghulam. – TradeArabia News Service