JEDDAH – The continued subsidy on feedstock costs, expansion in valuation multiples and lower risk premium has increased Saudi petrochem price targets by an average of 6 percent, Iyad Ghulam, equity research analyst at NCB Capital said Monday on its latest update on the Kingdom's petrochemicals sector. “However, the slow global economic recovery and subsequent impact on petrochemical demand remain the sector's key concern,” he noted. NCB Capital, the GCC's leading wealth manager and the Kingdom's largest asset manager, has downgraded Sipchem and Sahara to Neutral while maintaining all other ratings, remaining Overweight on SABIC, SIIG, Yansab and APPC. The update downgrades Sipchem and Sahara to Neutral from Overweight off the back of the recent rally in stock prices. Sipchem is up 17.3 percent, while Sahara is up 10.7 percent since NCB Capital's last update in March 2013 compared to a 7.7 percent increase in TASI. However, progress in the ongoing merger talks between Sahara and Sipchem is a key catalyst in the near term. Due to the lack of clarity, NCB Capital has not incorporated this into its model. “We maintain our Overweight ratings on SABIC, SIIG, Yansab and APPC, and our Neutral ratings on SAFCO, Kayan, Tasnee and Petrochem,” Ghulam said. “Our top picks are SABIC and Yansab. Despite its strong growth outlook, SABIC has lagged the market rally while the strong dividend outlook is the key catalyst for Yansab.” “We have postponed the expected price hike of feedstock to January 2014 from 2Q13. Although initially planned for the beginning of 2012, we now believe the Ministry of Petroleum and Minerals will not announce a feedstock price hike in 2013. This delay has positively impacted our valuations on SABIC, Sipchem and SAFCO by an average of 1-2 percent while operating income increased by an average of 7 percent for 2013E.” NCB Capital expects the total net income of the 10 stocks under coverage to increase 15.2 percent YoY to SR38.3 billion in 2013 (against a decline of 18.5 percent YoY in 2012). The updated price targets are up by an average of 6 percent mainly driven by lower feedstock cost (a delay in ethane price hike and continued decline in propane prices improved operational efficiencies, and lower risk premium and multiples expansion. In 2014, the expected improvement in demand and higher earnings from startups are expected to increase net income by 8.5 percent YoY to SR41.5 billion despite the expected decrease in ethane subsidy. SABIC New projects, attractive valuation and good entry point. “We remain Overweight on SABIC with a revised PT of SR121.5. The stock has underperformed the TASI by 7.7 percent since our last update,” Ghulam further said. “It is currently trading at 2013E P/E of 10.6x, a 20 percent discount to its local and global peers. We believe this is unjustified given SABIC's strong earnings outlook and expansion plans. In addition, the stock offers an attractive dividend yield of 5.4 percent in 2013E.” Sipchem Valuations stretched – downgrade to Neutral. NCB Capital downgrades Sipchem to Neutral from Overweight with a revised PT of SR25.2. The stock has outperformed the TASI by 10 percent since the last update in March 2013. It is currently trading at 2013E P/E of 14.2x, a 21 percent premium to peers. Saudi Kayan More shutdowns in 2Q13 “We remain Neutral on Saudi Kayan with a PT of SR13,” said Ghulam. “Despite lower feedstock costs, the company is expected to report a net loss in 2013 due to shutdowns and high interest expenses. However, we expect Kayan to start reporting profits by 2014. Yansab Dividend announcement major catalyst. “We remain Overweight on Yansab with a revised PT of SR64.9,” said Ghulam. “Lower feedstock costs, multiple expansion and lower risk premium increased our PT by 7.9 percent. Net income is expected to grow 24.1 percent YoY in 2013 driven by lower feedstock costs and higher prices. – SG
