Recent global macroeconomic trends have been volatile,
for instance, the slowdown in the Chinese economy and the persisting Euro zone
debt crisis, which could snowball into a global economic crisis.
Rise in feedstock costs to mainly affect pure-play
producers. Though the Saudi government has deferred raising the prices of
ethane and methane for now, Al-Rajhi Capital expects an increase in prices in
2013 (from $0.75/mmbtu to $1.25/mmbtu). In such a scenario, we expect pure-play
producers to be impacted more than those having a diversified product offering.
NIC & SABIC (Saudi Basic Industries Corp.) to lead the
pack. “We like stocks with a diversified product mix having a global reach in
this uncertain environment. We have developed a rating matrix, which confirms
our view that diversified companies like NIC and SABIC are more attractive than
their peers,” Al-Rajhi Capital said.
Besides NIC and SABIC, Sipchem is in the list for its
robust operational performance and high exposure to methanol. Yansab is expected
to report better results in H1, 2012, on the back of favorable product mix.
All in all, Saudi petrochemical companies are already
trading at relatively low multiples, which gives them a cushion against
unfavorable product price movements and a probable increase in feedstock costs.
Al-Rajhi Capital tracks six companies in the Saudi
petrochemical sector. NIC is top pick with a score of 3.3, closely followed by
SABIC and Sipchem (3.1 and 3.0 respectively). Sipchem is one of top picks on
the back of its exposure to methanol, attractive dividend yield (5.9 percent)
and cooperative investor relations. Yansab comes in fourth with a score of 2.5
on account of healthy operating performance and financial health; however,
scores low on dividend yield. Saudi Kayan comes in the fifth place with a
rating of 2.0, due to its limited operating history and concentrated
geographical & business profile. PetroRabigh remains the last with a score
of 1.7 due to lower margins, weak track record, and stretched financials.
According to the Saudi Ports Authority, growth in
petrochemical exports from Saudi Arabia slowed down substantially to just 1.9
percent during May-December 2011 period, as compared to growth of 10 percent
reported during the January-April 2011 period. Demand growth for petrochemical
products remained sluggish since mid-2011, mainly due to the tightening of
monetary policy in China, which led to a slowdown in GDP growth (8.9 percent
GDP growth reported in Q4, 2011, the slowest in the last two and a half years)
and the escalating European debt crisis.
Al-Rajhi Capital believes that high-cost production
centers will be the most affected during the next 1-2 quarters given the
weakness in global demand, while exports from Saudi Arabia will not be impacted
as the country is one of the lowest cost producers globally. However, product
prices will remain under pressure due to the uncertain economic outlook,
putting a pressure on the performance of Saudi petrochemical producers.
