NCB Capital expects petrochemicals earnings to grow 16% despite weak 1Q13

In its latest update on the Petrochemicals sector, NCB Capital upgrades APPC and Yansab to Overweight, while maintaining all other ratings.

“We remain overweight on Sipchem, SABIC, Sahara and SIIG. Increased earnings from startups and better operational efficiencies at existing facilities should lead to a 16% YoY growth in sector net income in 2013E,” said Iyad Ghulam, Equity Research Analyst at NCB Capital. “Slow economic growth continues to delay demand recovery for petrochemicals and will keep prices broadly flat in 2013E.”

NCB Capital upgrades APPC to Overweight from Neutral due to:

1) improved operational efficiencies which we believe are sustainable in the coming quarters.

2) strong outlook for Polypropylene prices due to tight supply and.

3) a FCF yield of 10.9% with no capex plans which raises the possibility of higher dividends being paid in the near term.

NCB Capital upgrades Yansab to Overweight from Neutral due to:

1) an anticipated multiple expansion from commencement of dividends and,

2) improved earnings outlook. Start of dividend payments in 2013E is a key catalyst in the near term. We expect Yansab to distribute DPS of SR2.5 in 2013E with a payout of 48% and dividend yield of 4.9%. “We expect the payout ratio to increase by around 10% per annum, reaching 81% in 2017E,” explained Mr. Iyad. “We believe Yansab and APPC will outperform market in near term. Yansab and APPC offers strong upside potential in the short run based on an attractive dividend outlook and rising earnings. SABIC and Sipchem remain value picks for long term investors.” 

NCB Capital estimates the total net income of the stocks under coverage to increase by 16.1% YoY to SR38.6bn in 2013E, after falling 18.5% YoY in 2012. Higher earnings from startups (Petrochem and Sahara’s projects), better operational efficiencies at existing plants and lower losses by Kayan will drive earnings in 2013E. “This is despite shutdowns which will negatively impact 1Q13E earnings and the possible increase in natural gas prices to USD1.5/mmbtu in 2Q13E. Extension of the current price or lower than expected increase in gas prices will positively impact our estimates,” Commented Mr. Iyad. 

Petrochemical demand outlook remains weak.

IMF projects global GDP to expand by 3.5% in 2013 slightly higher than 3.2% in 2012 as higher growth in emerging economies is partially offset by slower economic growth in the US and the continued economic instability in Europe. 

“Though 1Q13 saw higher petrochemical demand from Asia (mainly China), we maintain our cautious demand outlook for the remaining quarters of 2013 on slower recovery in the US economy and continued recession in the Eurozone,” said Iyad Ghulam. “We, therefore, expect petrochemical prices to move up in a narrow range of 2-8% as seen in 1Q13 as the tight supply is expected to ease with global supply returning to normal levels in the coming months.” 

Oversupply to increase pressure on fertilizer prices 

Drought and changing weather conditions resulted in weak agriculture production in 2012, thereby increasing the demand for fertilizers. The international fertilizers agency (IFA) expects the demand for fertilizers to remain unchanged in 2013, followed by an improvement in 2014. However, oversupply remains the key concern as fertilizer facilities globally are operating at an average utilization rate of 82%. Capacities are expected to grow further by 5% this year with increasing supply from China, Asia and the Middle East. Around 140 new fertilizer facilities are expected to start production in 2013-2014, mainly in China. 

“We project the anticipated increase in supply to lower urea prices by 3.8% YoY to USD428/mt and ammonia prices by 11.6% to USD506/mt in 2013,” commented Iyad Ghulam. “The decline in ammonia prices is higher than urea due to the lower ammonia supply in 2H12 which led to a significant rise in prices, despite moderate demand fundamentals.” 

Natural gas prices expected to increase in 2Q13

Following the extension of the natural gas price subsidy for one year in 2012, KSA’s Ministry of Oil is now expected to lower the subsidy in 2013. We are expecting gas prices to increase to USD1.5/mmbtu in 2Q13 from USD0.75/mmbtu. 

“We earlier expected that the price change will occur at the beginning of 2013,” said Iyad Ghulam. “However, we have changed the start date of the change to 2Q13 from 1Q13 as no official decision was made. If there is no decision made in 2Q13, we will delay the planned increase in prices to 1Q14.” 

Summary of company-specific ratings released:

ADVANCED PETROCHEMICALS

NCB Capital upgrades APPC to Overweight from Neutral with a revised PT of SR32.6. The estimates are revised up due to improved efficiency and higher PP prices. As PP demand growth outpaces supply, the pricing outlook remains positive. Moreover, with an attractive FCF yield of 10.9% and the lack of expansion plans, it has the potential to increase dividends. 

YANSAB

“We upgrade Yansab to Overweight with a PT of SR60.2. Given the upcoming expected dividend from Yansab,” stated Iyad Ghulam “We believe the multiple it trades on should be compared to SAFCO rather than other Saudi petrochemical firms. Yansab currently trades at a 25% discount to SAFCO on 2013E P/E, we believe this discount will narrow to 9% due to the expected start of dividend payments in 2013E.” 

SABIC

NCB Capital reiterates its Overweight rating on SABIC with a revised PT of SR120.5. A slight increase in petrochemical prices and lower propane cost is likely to support 2013E earnings, despite NCB Capital’s expectation of natural gas prices doubling in 2Q13. The focus on expanding its product portfolio and geographical reach offer additional growth opportunities in the long run. 

SIPCHEM

“We remain Overweight on Sipchem with a PT of SR24.2,” noted Iyad Ghulam. “We have revised our 2013E net income estimate down by 15% to incorporate the effect of the shutdown at four out of five of its plants. While expectations of a slower ramp up at phase III plants have lowered 2014E estimates, any positive news on phase III remains a key catalyst for the stock in the near term.” 

SAHARA PETROCHEMICAL

NCB Capital remains Overweight on Sahara with a revised PT of SR15.6. The improvement in Al Waha’s operating rate and the commencement of operations at the new facilitates are expected to support 2013E earnings growth. However, the change in SAP project start-up and higher naphtha prices have lowered NCB Capital’s 2013E estimates. 

SIIG

We reiterate our Overweight rating on SIIG with a revised PT of SR27.2,” Stated Iyad Ghulam. “Earnings outlook remains strong due to the significant expected contribution from Petrochem in 2013E and Nylon 6,6 in 2014E as well as the improved operational efficiencies at existing facilities. However, we have lowered our 2013E net income estimate by 17.6% to factor the month-long shutdown at three of its projects.” 

TASNEE

NCB Capital remains Neutral on Tasnee with a revised PT of SR30.1. Although weak demand and prices for TiO₂ limit earnings growth in the near term, new petrochemical capacities and a recovery in demand is expected to support earnings growth in 2014E. Tasnee’s unique business model and strong project pipeline is likely to support earnings in the long-term. 

SAFCO

We remain Neutral on SAFCO with a revised PT of SR160.8,” said Iyad Ghulam. “Our 2013E estimates have increased by 6-12% due to the slower than expected decline in ammonia prices. Despite this, the current stock price offers a limited upside as we believe the majority of the positives are already priced in. The key advantage of the stock remains its strong dividend yieldof 7.1%. 

SAUDI KAYAN

NCB Capital remains Neutral on Kayan with a revised PT of SR12.7. Shut downs and operating inefficiency are the main reason behind our downward revision. NCB Capital expects the company to start reporting net profits in 2014E, supported by the improvement in operating rates and the production of new products. Despite the current low stock price, NCB Capital remains cautious on the stock.    

PETROCHEM

“We remain Neutral on Petrochem with a revised PT of SR18.8,” stated Iyad Ghulam. “The stock has a strong earnings outlook with 2013E net income expected to reach SR890mn, driven mainly by the improvement in SPCo’s operating rates and strong petrochemical prices. However, any delay in reaching full operating rates will impact Petrochem’s earnings and price.”