RIYADH – The global economic uncertainty continues to put pressure on the Saudi petrochemical sector, said NCB Capital – the GCC's leading wealth manager and the Kingdom's largest asset manager, Wednesday. Weak demand and increasing supply are restricting price growth. Operational inefficiencies at the new startups are also contributing to the weak performance, the report noted. Commenting on the 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 KSA petrochemical sector dropped 19.1 percent YoY to SR9.1 billion in 3Q12 on the back of increased feedstock costs and lower petrochemical prices. On a QoQ basis, the sector's total net income grew 25.7 percent mainly due to increased sales and other income. In 4Q12, 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 4Q12. “We estimate Petrochem to continue to report losses in 4Q12, 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,” Ghulam said. The report forecast that the total net income of the 10 stocks under coverage will decline by 17.6 percent 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 percent 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. 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 percent over the past three months vs. the TASI which is down 5.3 percent. We expect 2013E P/E of 10x, falling to 8.9x in 2014,” Ghulam said. “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,” he added. Moreover, the report 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 percent due to expected margin pressure and shutdowns. However our price target of Tasnee is down 19.1 percent due to a negative TiO2 outlook. Our price target of Saudi Kayan is down 16.5 percent due to continued weakness in operational performance,” Ghulam said. — SG
