|05 April, 2020

Saudi market outlook: As product prices sink, target prices of petchem stocks slashed

No material recovery seen in petrochemical prices until 2022

A man checks his mobile phone next to a screen with Saudi Stock Exchange (Tadawul) prices in Riyadh, Saudi Arabia September 16, 2019. REUTERS/Stringer

A man checks his mobile phone next to a screen with Saudi Stock Exchange (Tadawul) prices in Riyadh, Saudi Arabia September 16, 2019. REUTERS/Stringer

Petrochemical prices are set to decline within a range of 15-20 percent in 2020 and no material recovery is seen until 2022, said Al Rajhi Capital in a note on the sector.

“While supply side pressures had been leading the decline in petchem prices in the past many quarters, now demand pressures due to the current pandemic have even more widened the gap,” said Pritish Devassy, head of equity research, at the investment bank said. 

On the positive side, given their low-cost structures, Saudi petchems would be best positioned in the case of a recovery because of operating leverage relative to global chemical firms as well as other local sectors.

“Initially, exposure to China/ Asia Pacific was considered as key negative for petchems but given current state we expect China could lead the recovery and subsequently exposure to these nations could lead the early stages of growth in the recovery.”

The investment bank has cut target prices of all the petrochemical companies under its coverage.

SABIC

Rating is maintained on the petrochemical giant at neutral with target price cut to 73 Saudi riyals from 95 riyals earlier.

Key themes: SABIC’s earnings in 2020 is set to be dented on 15-20 percent lower petchem prices and relatively higher feedstock prices (propane and butane) in Q1 2020.

The investment bank expects SABIC to lower dividend per share (DPS) at 4 riyal per, implying a dividend yield of 5.8 percent for 2020.

Upside triggers: Higher-than-expected spreads, faster than expected successful commercial launch of its future expansion projects and recovery in global demand.

Downside risks: Supply of new capacity, unexpected fall in oil price and petchem product prices, and unplanned plant shutdowns.

YANSAB

This SABIC affiliate’s rating is revised to neutral from overweight with target price cut to 44 riyals from 55 riyals.

Key themes: The near-term performance is likely to remain weak, due to higher propane price coupled with weak prices of its key products.

SABIC cut its monoethylene glycol (MEG) prices by approximately 15 percent for February-March 2020 due to slowdown in Chinese economy amid coronavirus and lower demand. Accordingly, Al Rajhi has cut its MEG price forecast to $623 per tonne for 2020.

Upside triggers: Higher than expected rise in MEG prices and better-than-expected dividends from the estimated 2.50 riyals per share for 2020.

Downside risks: Further fall in product prices. Any unplanned plant shutdowns will also weigh.

APCC:

Al Rajhi Capital revises its rating on APCC to neutral from overweight with target price cut to 44 riyals from 55 riyals.

Key themes: Lower product spreads amid weak polypropylene prices (6 percent quarter on quarter decline on an average in Q1 2020 so far) and higher average propane price (16 percent q-o-q increase so far in Q1 2020).

Further, SK Advanced plant closure is likely to result in lower equity income but APCC’s ability to “control its costs will help it to partially offset this impact.”

Upside triggers:  Increase in dividend per share to 2.40 riyals per share with a dividend yield of 5.6 percent for 2020E.

Downside risks: Further weakness in product prices and any unplanned plant shutdowns.

SAFCO

SAFCO’s rating is maintained at neutral with target price cut from to 65 riyals from 75 riyals per share.

Key themes: Average urea prices continue to remain under pressure. Al Rajhi Capital expects price to be approximately 5 percent lower at $246 per tonne in 2020.

SAFCO III and V plants to be closed for maintenance in H2 2020 and Ibn AlBaytar will close plants for maintenance in H2 2020, implying lower net income in 2020

Upside triggers:  Major shutdowns of urea plants globally, higher than-expected rise in urea demand/and prices and better-than-expected DPS at 3 riyals.

Downside risks: Steep decline in urea price and acquisition of associates/subsidiaries at expensive valuations. Surplus natural gas may also lead to structurally lower prices for urea

SIPCHEM:

SIPCHEM has its target price cut from to 13 riyals from 20 riyals per share with rating revised to neutral from overweight.

Key themes: SIPCHEM’s near-term performance is likely to remain under pressure, due to weak product prices on lower product demand.

Further, early March 2020, the company announced an unplanned shutdown at Al Waha’s PDH plant for about two weeks. It then decided to carry out its planned maintenance shutdown at Al Waha’s PDH plant in March rather than on April 1, as scheduled earlier.

Key upside triggers:  Better-than-expected product prices, faster-than-expected ramping up of production and higher dividends in 2020.

Downside risks: Unexpected disruption at the company’s upstream operations, which can further impact its downstream plants as well and persistent weakness in product prices, particularly methanol.

TASNEE:

Tasnee’s ratings are revised from underweight to neutral and with target price cut to 8.50 riyals from 10.40 riyals per share.

Key themes: Tasnee will continue to depend on associates’ performance, mainly SEPC and SPC, which may remain weak amid the slowdown in the global economy. Nonetheless, TiO2 prices have remained stable over the past few months, which may lead to a better contribution from Tronox.      

Upside triggers: Sustained rally in petchem prices, better operating performance of associates and lower minority income.

Downside risks: Decline in petchem prices, write off of any assets, further impairment in associates and shutdowns at petrochemical plants.

Saudi Kayan:

Kayan is unlikely to report a profit in 2020 after a string of losses in in four of last five quarters, weighed down by continuous weakness in key product prices, particularly MEG and polycarbonates. In addition, the company’s MEG plant was shut for 21 days in February.

(Reporting by Brinda Darasha, editing by Seban Scaria)

seban.scaria@refinitiv.com

#SAUDI #PETROCHEMICAL #EQUITIES #MARKET

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© ZAWYA 2020

More From Commodities