- RIYADH: NCB Capital, Saudi Arabia's largest investment bank and leading GCC wealth manager, said in a new report issued Wednesday that with the long-term advantages remaining intact, the bank believes the Saudi petrochemical stocks look attractive at current valuation levels.
- However, in the near term, concerns on the global economy could lead to weakness in petrochemical prices and demand.
Commenting on the new report, Tariq Al-Alaiwat, equity research analyst at NCB Capital, 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. 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 Saudi producers expanding and diversifying production base are key positives."NCB Capital expects total net income of the stocks under its coverage to increase by 52 percent YoY to SR38.5 billion, benefiting from the start-up of Sahara's Al-Waha facility, the full year earnings from Yanbu National Petrochemical Company (Yansab) and Saudi International Petrochemical Co. (Sipchem's) Phase II, and higher petrochemical prices. Saudi Kayan Petrochemical Co.’s production, which is expected to start in Q4, 2011, would further support the bottom line growth.Al-Alaiwat added: "Concerns on the global economy have led to increased volatility in the Saudi stock market. The TASI petrochemical index is down 7 percent in August 2011. From stocks under our coverage, Sahara is down 12 percent, National Industrialization Co. (Tasnee) is down 11 percent and Sipchem is down 10 percent 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 and Yansab, 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 2011 revenues to grow 62 percent YoY to SR3.2 billion with a net income of SR636 million, up 68 percent YoY. Benefiting from its Phase II contribution, NCB Capital believes that increased production capacity and higher petrochemical prices are key growth drivers.Saudi Basic Industries Corp. (SABIC) was also NCB Capital's top pick keeping its overweight rating on the stock with a revised target price of SR124.3. The bank believes that at current levels the stock offers an attractive investment opportunity considering its earnings growth potential and expanding production base.
