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Al Rajhi Capital has raised its target price on Saudi Basic Industries Corp (SABIC) to 120 Saudi riyals ($32) per share from the earlier 115 riyals per share following its robust first-quarter 2021 results and on potential synergies from the Aramco deal.
In a report the Riyadh-based investment bank said given the upward movement in petrochemical prices over the past few quarters, the company is likely to witness strong earnings growth in 2021.
It has, however, maintained a Neutral rating on the stock as the price has “already gained 22 percent YTD, implying the fundamentals are already priced.”
The petrochemicals group, which is majority owned by state oil giant Saudi Aramco, reported a Q1 net profit of 4.86 billion riyals, pivoting from a loss in the same period a year earlier.
Al Rajhi Capital said the result was largely in-line top-line and bottom-line, as improved cost efficiencies, along with likely higher-than-expected equity income offset weaker-than-expected sales volume during the quarter.
“While petrochemicals sales volume declined by 8 percent q-o-q (vs. 1 percent drop q-o-q expected), Agri-Nutrients segment witnessed a decline of 18 percent q-o-q. Hadeed sales volume remained mostly unchanged sequentially. Nonetheless, product prices across the business segments increased sequentially, helping the top-line to grow in Q1,” it said.
In Q2, SABIC’s EBITDA margin likely to remain stable compared to 28 percent in 1Q on annual sales volume between 2-5 percent.
Further, the company expects capex to remain flat annually in 2021. Higher earnings and controlled capex are also likely to be translated in higher payout of 4.4 riyals per share in 2021E vs. 3 riyals per share in 2020. However, “despite
the ability to pay even higher (EPS of 6.7 riyals/share expected for 2021e), we believe, given the weak performance in 2020, the company may increase dividends in only a phased manner.”
In its results statement SABIC had targeted $1.5 billion to $1.8 billion of recurring annual value creation and synergy by 2025. It said 80 percent of the synergies would be accrued through the sales and marketing rights of approximately 5.4 million metric tonnes of chemicals and polymer products to be transferred from Saudi Aramco to SABIC.
According to Al Rajhi Capital, supply of new capacity globally, unexpected fall in oil price and petchem product prices, and unplanned plant shutdowns are key downside risks. Key upside risks include higher-than-expected spreads, faster than expected successful commercial launch of its future expansion projects, and recovery in global demand.
(Reporting by Brinda Darasha; editing by Daniel Luiz)
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