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Riyadh-based investment bank Al Rajhi Capital has revised upward the target price on the stock of state oil producer Saudi Aramco from 35 riyals ($9.33) per share to 37 riyals per share.
The target price has been increased following the third-quarter performance of the oil giant, whose stock closed at 37.60 riyals on Sunday.
The premium is based on a 3.75 percent dividend yield on the 2021 dividend per share of 1.4 riyals per share, the brokerage said in a note.
The oil producer’s Q3 net income has more than doubled to $30.4 billion from the year earlier period, beating most analysts’ estimates.
The profit beat was "mainly driven by strong refining and chemical margins, coupled with lower-than-expected operating costs," said Al Rajhi Capital.
The brokerage said Aramco is expected to continue generating robust cash flows, driven by firm oil prices, gradual rise in production, healthy downstream margins and improved “cost efficiencies/synergies”.
Dividend play
Aramco’s dividend for Q3 2021 of 0.3518 riyals per share was in line with expectation, Al Rajhi Capital said.
Given the improving oil market dynamics, sustainable earnings recovery, healthy FCF, and strong balance sheet, the brokerage also expects Aramco to distribute at least 1.4 riyals per share dividend for 2021, implying a dividend yield of around 4 percent based on the current price.
If oil prices sustain at the current level "there is a possibility of an increase in the distribution beyond the current dividend pledge.”
“We do not yet expect an increase in dividends despite the capability to raise dividends. This is because we believe the company is driven by longer term goals and is likely to exhibit resilience and stability," Al Rajhi Capital noted.
The brokerage said it believes that the stock deserves to trade at a premium, given its healthy cash flow generation ability, lowest production costs, robust balance sheet and massive dividend commitments.
“Our target price implies a neutral rating based on the current market price. We view Aramco more like a bond and, hence, value it unconventionally.”
(Writing by Brinda Darasha; editing by Cleofe Maceda)
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