SAUDI ARABIA: Saudi petrochemical firms healthy despite global uncertainties

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 too 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.

Source: Daily "Arab News", Riyadh; 22 Feb 2012

(Syed Rashid Ali, Karachi, Pakistan)