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Saudi Arabia’s petrochemical producers are well-placed to benefit from the recent surge in polymer prices and are likely to see a strong recovery in earnings in 2021, implying the possibility of higher dividends this year.
In a report on the sector, Al Rajhi Capital, a Riyadh-based financial services firm, said average polymer product prices rose 4-15 percent quarter-on-quarter (q-o-q) so far in Q1 2021. This has also been aided by an over 30 percent jump in oil prices, coupled with optimism over healthy demand amid distribution of COVID vaccines globally.
More recently, tight supply mainly due to US supply disruptions on account of winter storm, along with rising upstream costs and healthy downstream demand, has pushed current spot prices 18-56 percent above 2019 average prices.
“We model polymer prices to remain at these elevated levels for at least a large part of the year, on the back of tight supply (peak turnaround season ahead in China from April), and a gradual improvement in demand worldwide,” said Pritish Devassy, analyst at Al Rajhi Capital.
However, the 30 percent q-o-q rise this quarter of average feedstock prices primarily driven by increased oil prices, could partially offset the likely improvement in spreads for most products.
“Nonetheless, we expect key feedstock (propane and butane) prices for Saudi producers to gradually come down in the coming quarters, due to seasonal factors (generally higher in Q1 and Q4),” he added.
For Saudi Basic Industries Corp., the world’s fourth-biggest petrochemicals firm, this could mean a strong revival in earnings and therefore, dividends.
“Accordingly, we believe the company could go back to paying 4.4 riyals ($1.17) per share as dividends from 2021e. Despite the ability to pay even higher (EPS of 6.7 riyals ($1.79) per share expected for 2021e), we believe given the weak performance in 2020, the company may increase dividends in only a phased manner.”
The company paid 4.4 riyals per share in 2018 and 2019. Product prices are well on their way to 2018 levels when SABIC used to trade around 120 riyals ($32) per share, which may be a good indicator of where the stock could reach. Al Rajhi Capital has a target price of 115 riyals ($30.67) per share on SABIC.
Saudi International Petrochemical Co. (Sipchem) benefited from rising methanol and polypropylene prices. “The company has returned to its prior levels of gross margins and at these prices, we believe the margins are likely to remain firm going forward.”
Further, though the company benefitted from the sale of precious metals, which is a one-off, the company has suspended a couple of its loss-making plants which would mostly offset this. Sipchem would “prioritize dividends over paying off debt which is at comfortable levels.”
For SABIC Agri-nutrients, the improvement in urea prices is beneficial. Historical trends show that urea price fluctuates in tandem with share price. While industry reports indicate global capacity growth will outpace global demand for urea, the company is also seeking to expand its presence in major markets.
Yanbu National Petrochemical Company (Yansab) stock has benefited from the sharp rise in mono-ethylene glycol (MEG), according to the report.
The investment firm has kept its target price on the stock unchanged at 70 riyals ($18.67) per share implying MEG price at $800/tonne for 2021, below the five-year average of $859/tonne and only 8 percent above 2019 levels.
(Reporting by Brinda Darasha; editing by Daniel Luiz)
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