Saudi Arabian Petrochemicals 04 January 2015 PDF
Saudi Arabian Petrochemicals 4Q2014 Preview
January 4, 2015
Expanding Margins Declining petrochemical prices in tandem with oil has been the highlight of the quarter. However, petchem margins have improved in 4Q substantially worldwide as feed prices have fallen faster. This is a temporary phenomenon and we anticipate margins to shrink in 1Q2015. Plummeting oil prices have been blamed on weak demand and more than adequate supply led by additional output from Iraq and Libya adding to the rising Shale output. Average ethylene prices are down -11% Y/Y at USD 1,143/ton in the outgoing quarter. Propylene prices have also decreased -6% Y/Y to an average of USD 988/ton in 4Q. After declining in 3Q, methanol prices have started to pick up from September-end and are now upto USD 435/ton, Brent is now down -26.2% Q/Q to USD 77/bbl after testing lows of close to USD 56/bbl. Market participants do not believe that the worst is over in oil and we may see some further correction early next year.
Exhibit 1: Basic Petrochemicals Prices (USD/ton) 1,800 1,600 1,400 1,200
1,000 800 600 Jan-14
Mar-14
May-14 Ethylene
Jul-14
Sep-14
Nov-14
Propylene
Source: Bloomberg
Urea prices have performed well in 4Q, rising +13% Y/Y to USD 365/ton, particularly in an environment when commodity prices in general have taken a beating. However, urea has already taken the pain in 2H2013 and 1H2014. Ammonia prices have moved even more strongly, going up +40% Y/Y and +23% Q/Q to an average of USD 622/ton. Volatility in ammonia market has been observed to be much greater than urea with the two commodities moving in opposite directions many times. Fertilizer prices are benefitting from resurgence in demand coupled with decrease in the oversupply situation which was experienced for much of 2014.
Muhammad Faisal Potrik [email protected]
+966-11-203-6807
Yasser bin Ahmed [email protected] +966-11-203-6805
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37) | 1
Saudi Arabian Petrochemicals 4Q2014 Preview Exhibit 2: Urea and Ammonia Prices (USD/ton) 800 700 600 500 400 300 200 Jan-14
Mar-14
May-14 Urea
Jul-14
Sep-14
Nov-14
Ammonia
Source: Bloomberg
On Q/Q basis, ethylene is down -9% while propylene is down -7%. Brent crude is 24% lower Q/Q on greater supply and weakening demand. Urea prices are now rising, up +11% Q/Q. Exhibit 3: Quarterly Average Commodity Prices (USD/ton) 1,400
120
1,200
100
1,000 80 800 60 600 40
400 20
200
0
0 1Q14 Ethylene
2Q14 Propylene
3Q14 Urea
4Q14 Brent Crude (USD/bbl)
Source: Bloomberg
Volatile Oil Prices As stated in our sector update dated December 18, 2014, our core premise for the petrochemical sector is that investors should look beyond 2015. Next year will be bad as the full impact of lower oil prices is realized in terms of a drop in petrochemical
|2
Saudi Arabian Petrochemicals 4Q2014 Preview prices and more importantly margins. On the face of it, the market seems to have discounted 2015 pain in stock prices. For the Saudi Petrochemical sector, predominantly ethane based producers will feel a greater pinch as the feed price remains the same (USD 0.75/mmbtu) while product prices decline. Producers with a greater proportion of heavier feed such as naphtha should be affected to a lesser extent as feed prices also fall. Although we expect margins to contract across the board, the drop in margins will be softer for heavier feed versus ethane based producers. With the steep decline in oil prices and corresponding slump in the Tadawul, the question is where will oil (and consequently the market) go from here? The focus right now is on maintaining market share, which has led to a buyers’ market as producers cut their Official Selling Prices (OSP) to attract consumers. Exports to the US from Saudi Arabia have declined by 200,000 bpd now as compared to the beginning of the year. We believe KSA’s October crude production of 9.7 million bpd can be maintained over the next year. Although it is not wise to predict oil prices, we do not believe that the current WTI level of around USD 55 is sustainable over the medium term. While it is possible that WTI may drop even below USD 50, this will not be a longer term phenomenon assuming no major negative developments in the region and stable global geo-political situation. We now view US based shale as the swing players for international oil prices as OPEC seems to have given up that role for the time being.
4Q Expectations Table 1 below details our 4Q2014 forecasts for petrochemical companies. Overall, we expect a -3% Y/Y decrease in revenues for our coverage universe. We have to clarify that the Y/Y comparison is misleading for some names. For example, the full impact of the financial support by shareholders was completely booked in the final quarter leading to an extraordinary bottom line at Petro Rabigh last year. On the other hand, there have been production gains at Petrochem (impacting SIIG as well), Advanced and Tasnee thereby raising revenues despite lower product prices. Yansab was hit by a shutdown causing a slump in 4Q2013 profitability. Safco revenues and net income will be helped up by better urea prices after a few quarters of below par performance. We expect lower petchem price impact to be somewhat muted in the case of Sabic with only a -4% Y/Y decline in topline but a larger -12% Y/Y lower EPS on lower noncore income as well as higher minority interest. Net income is forecasted to drop -11% over the similar quarter last year on average for the petchem companies under our coverage. If we exclude Petro Rabigh (which posted an extraordinary income in 4Q2013), the net income decline stands at only 2% Y/Y. We expect Saudi Kayan to be one of the worst affected on expected margin contraction next year. For 4Q, however, we may see a marginal increase in net profit from SAR 3 million to SAR 19 million.
|3
Saudi Arabian Petrochemicals 4Q2014 Preview Table 1: 4Q2014 Estimates (SAR mln, except per share data) Revenues Company
4Q2013
PETROCHEM
EBIT
4Q2014E
Y/Y Chg
4Q2013
4Q2014E
29%
192
409
Net Income Y/Y Chg
4Q2014E
75
209
EPS Y/Y Chg
4Q2013
4Q2014E
179%
0.16
0.44
1,486
1,913
SABIC
48,486
46,493
-4%
10,301
9,924
-4%
6,157
5,420
-12%
2.05
1.81
SAFCO
1,008
1,261
25%
658
858
30%
802
919
15%
2.41
2.76
TASNEE
4,524
5,051
12%
749
860
15%
293
313
7%
0.44
0.47
SIIG
1,486
1,913
29%
446
659
48%
203
353
74%
0.45
0.78
SAHARA
666
621
-7%
88
81
-8%
178
172
-3%
0.41
0.39
YANSAB
2,084
2,194
5%
535
675
26%
442
597
35%
0.79
1.06
SIPCHEM
1,191
892
-25%
361
250
-31%
197
117
-41%
0.54
0.32
ADVANCED
113%
4Q2013
764
844
10%
160
202
26%
161
190
18%
0.98
1.16
2,933
2,588
-12%
155
150
-3%
3
19
533%
0.00
0.01
PETRO RABIGH
13,673
12,546
-8%
498
353
-29%
1,240
343
-72%
1.42
0.39
Group Total
78,301
76,316
-3%
14,143
14,421
2%
9,751
8,652
-11%
SAUDI KAYAN
Source: Riyad Capital, Company Reports
We have revised downwards our target prices for all companies under coverage in our petrochemical sector update dated December 18, 2014. In addition, five stocks were upgraded to a Buy. Table 2 below details updated target prices and recommendations. At current prices, Sabic, Tasnee, SIIG, Sahara, Yansab and Petro Rabigh feature on our Buy list. For group average PE, we have excluded Saudi Kayan and Petro Rabigh. Table 2: Ratings and Valuations (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
PETROCHEM
2002
22.43
10,766
SABIC
2010
83.88
251,640
SAFCO
2020
143.98
47,993
TASNEE
2060
27.72
SIIG
2250
SAHARA
Dividend
P/E
P/B
Rating
Yield
2014E
2015E
2014E
2015E
23.00
Hold
2.2%
13.5x
10.3x
2.2x
1.9x
112.00
Buy
6.0%
10.2x
13.3x
1.2x
1.2x
156.00
Hold
6.6%
14.5x
13.8x
5.6x
5.3x
18,542
31.00
Buy
5.4%
14.4x
17.1x
0.9x
0.9x
25.80
11,610
32.00
Buy
7.8%
9.7x
9.0x
1.9x
1.8x
2260
15.39
6,753
20.00
Buy
6.5%
14.4x
9.7x
1.1x
1.1x
YANSAB
2290
47.63
26,792
65.00
Buy
5.2%
10.9x
13.5x
1.7x
1.6x
SIPCHEM
2310
26.62
9,761
28.00
Hold
4.7%
16.5x
15.3x
1.5x
1.5x
ADVANCED
2330
41.99
6,886
45.00
Hold
7.1%
9.2x
11.7x
2.8x
2.7x
SAUDI KAYAN
2350
11.15
16,725
12.00
Hold
-
-
1.2x
1.2x
PETRO RABIGH
2380
18.91
16,565
23.00
Buy
-
13.5x
23.9x
1.6x
1.6x
12.6x
12.6x
2.0x
1.9x
Group Average
-
Source: Riyad Capital
|4
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
Head Office Riyad Capital P.O. Box 21116 Riyadh 11475 Saudi Arabia Phone 800 124 0010 Website www.riyadcapital.com Email [email protected]
Disclaimer This research document is prepared for the use of clients of Riyad Capital and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Riyad Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Riyad Capital. The information herein was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Riyad Capital make no representations or warranties whatsoever as to the data and information provided and Riyad Capital do not represent that the information content of this document is complete or free from any error. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document.
Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Riyad Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments. Riyad Capital shall not be liable for any loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document is subject to change without prior notice.”
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
January 4, 2015
Expanding Margins Declining petrochemical prices in tandem with oil has been the highlight of the quarter. However, petchem margins have improved in 4Q substantially worldwide as feed prices have fallen faster. This is a temporary phenomenon and we anticipate margins to shrink in 1Q2015. Plummeting oil prices have been blamed on weak demand and more than adequate supply led by additional output from Iraq and Libya adding to the rising Shale output. Average ethylene prices are down -11% Y/Y at USD 1,143/ton in the outgoing quarter. Propylene prices have also decreased -6% Y/Y to an average of USD 988/ton in 4Q. After declining in 3Q, methanol prices have started to pick up from September-end and are now upto USD 435/ton, Brent is now down -26.2% Q/Q to USD 77/bbl after testing lows of close to USD 56/bbl. Market participants do not believe that the worst is over in oil and we may see some further correction early next year.
Exhibit 1: Basic Petrochemicals Prices (USD/ton) 1,800 1,600 1,400 1,200
1,000 800 600 Jan-14
Mar-14
May-14 Ethylene
Jul-14
Sep-14
Nov-14
Propylene
Source: Bloomberg
Urea prices have performed well in 4Q, rising +13% Y/Y to USD 365/ton, particularly in an environment when commodity prices in general have taken a beating. However, urea has already taken the pain in 2H2013 and 1H2014. Ammonia prices have moved even more strongly, going up +40% Y/Y and +23% Q/Q to an average of USD 622/ton. Volatility in ammonia market has been observed to be much greater than urea with the two commodities moving in opposite directions many times. Fertilizer prices are benefitting from resurgence in demand coupled with decrease in the oversupply situation which was experienced for much of 2014.
Muhammad Faisal Potrik [email protected]
+966-11-203-6807
Yasser bin Ahmed [email protected] +966-11-203-6805
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37) | 1
Saudi Arabian Petrochemicals 4Q2014 Preview Exhibit 2: Urea and Ammonia Prices (USD/ton) 800 700 600 500 400 300 200 Jan-14
Mar-14
May-14 Urea
Jul-14
Sep-14
Nov-14
Ammonia
Source: Bloomberg
On Q/Q basis, ethylene is down -9% while propylene is down -7%. Brent crude is 24% lower Q/Q on greater supply and weakening demand. Urea prices are now rising, up +11% Q/Q. Exhibit 3: Quarterly Average Commodity Prices (USD/ton) 1,400
120
1,200
100
1,000 80 800 60 600 40
400 20
200
0
0 1Q14 Ethylene
2Q14 Propylene
3Q14 Urea
4Q14 Brent Crude (USD/bbl)
Source: Bloomberg
Volatile Oil Prices As stated in our sector update dated December 18, 2014, our core premise for the petrochemical sector is that investors should look beyond 2015. Next year will be bad as the full impact of lower oil prices is realized in terms of a drop in petrochemical
|2
Saudi Arabian Petrochemicals 4Q2014 Preview prices and more importantly margins. On the face of it, the market seems to have discounted 2015 pain in stock prices. For the Saudi Petrochemical sector, predominantly ethane based producers will feel a greater pinch as the feed price remains the same (USD 0.75/mmbtu) while product prices decline. Producers with a greater proportion of heavier feed such as naphtha should be affected to a lesser extent as feed prices also fall. Although we expect margins to contract across the board, the drop in margins will be softer for heavier feed versus ethane based producers. With the steep decline in oil prices and corresponding slump in the Tadawul, the question is where will oil (and consequently the market) go from here? The focus right now is on maintaining market share, which has led to a buyers’ market as producers cut their Official Selling Prices (OSP) to attract consumers. Exports to the US from Saudi Arabia have declined by 200,000 bpd now as compared to the beginning of the year. We believe KSA’s October crude production of 9.7 million bpd can be maintained over the next year. Although it is not wise to predict oil prices, we do not believe that the current WTI level of around USD 55 is sustainable over the medium term. While it is possible that WTI may drop even below USD 50, this will not be a longer term phenomenon assuming no major negative developments in the region and stable global geo-political situation. We now view US based shale as the swing players for international oil prices as OPEC seems to have given up that role for the time being.
4Q Expectations Table 1 below details our 4Q2014 forecasts for petrochemical companies. Overall, we expect a -3% Y/Y decrease in revenues for our coverage universe. We have to clarify that the Y/Y comparison is misleading for some names. For example, the full impact of the financial support by shareholders was completely booked in the final quarter leading to an extraordinary bottom line at Petro Rabigh last year. On the other hand, there have been production gains at Petrochem (impacting SIIG as well), Advanced and Tasnee thereby raising revenues despite lower product prices. Yansab was hit by a shutdown causing a slump in 4Q2013 profitability. Safco revenues and net income will be helped up by better urea prices after a few quarters of below par performance. We expect lower petchem price impact to be somewhat muted in the case of Sabic with only a -4% Y/Y decline in topline but a larger -12% Y/Y lower EPS on lower noncore income as well as higher minority interest. Net income is forecasted to drop -11% over the similar quarter last year on average for the petchem companies under our coverage. If we exclude Petro Rabigh (which posted an extraordinary income in 4Q2013), the net income decline stands at only 2% Y/Y. We expect Saudi Kayan to be one of the worst affected on expected margin contraction next year. For 4Q, however, we may see a marginal increase in net profit from SAR 3 million to SAR 19 million.
|3
Saudi Arabian Petrochemicals 4Q2014 Preview Table 1: 4Q2014 Estimates (SAR mln, except per share data) Revenues Company
4Q2013
PETROCHEM
EBIT
4Q2014E
Y/Y Chg
4Q2013
4Q2014E
29%
192
409
Net Income Y/Y Chg
4Q2014E
75
209
EPS Y/Y Chg
4Q2013
4Q2014E
179%
0.16
0.44
1,486
1,913
SABIC
48,486
46,493
-4%
10,301
9,924
-4%
6,157
5,420
-12%
2.05
1.81
SAFCO
1,008
1,261
25%
658
858
30%
802
919
15%
2.41
2.76
TASNEE
4,524
5,051
12%
749
860
15%
293
313
7%
0.44
0.47
SIIG
1,486
1,913
29%
446
659
48%
203
353
74%
0.45
0.78
SAHARA
666
621
-7%
88
81
-8%
178
172
-3%
0.41
0.39
YANSAB
2,084
2,194
5%
535
675
26%
442
597
35%
0.79
1.06
SIPCHEM
1,191
892
-25%
361
250
-31%
197
117
-41%
0.54
0.32
ADVANCED
113%
4Q2013
764
844
10%
160
202
26%
161
190
18%
0.98
1.16
2,933
2,588
-12%
155
150
-3%
3
19
533%
0.00
0.01
PETRO RABIGH
13,673
12,546
-8%
498
353
-29%
1,240
343
-72%
1.42
0.39
Group Total
78,301
76,316
-3%
14,143
14,421
2%
9,751
8,652
-11%
SAUDI KAYAN
Source: Riyad Capital, Company Reports
We have revised downwards our target prices for all companies under coverage in our petrochemical sector update dated December 18, 2014. In addition, five stocks were upgraded to a Buy. Table 2 below details updated target prices and recommendations. At current prices, Sabic, Tasnee, SIIG, Sahara, Yansab and Petro Rabigh feature on our Buy list. For group average PE, we have excluded Saudi Kayan and Petro Rabigh. Table 2: Ratings and Valuations (SAR mln) TASI
Current
Market
Target
Company
Code
Price
Cap
Price
PETROCHEM
2002
22.43
10,766
SABIC
2010
83.88
251,640
SAFCO
2020
143.98
47,993
TASNEE
2060
27.72
SIIG
2250
SAHARA
Dividend
P/E
P/B
Rating
Yield
2014E
2015E
2014E
2015E
23.00
Hold
2.2%
13.5x
10.3x
2.2x
1.9x
112.00
Buy
6.0%
10.2x
13.3x
1.2x
1.2x
156.00
Hold
6.6%
14.5x
13.8x
5.6x
5.3x
18,542
31.00
Buy
5.4%
14.4x
17.1x
0.9x
0.9x
25.80
11,610
32.00
Buy
7.8%
9.7x
9.0x
1.9x
1.8x
2260
15.39
6,753
20.00
Buy
6.5%
14.4x
9.7x
1.1x
1.1x
YANSAB
2290
47.63
26,792
65.00
Buy
5.2%
10.9x
13.5x
1.7x
1.6x
SIPCHEM
2310
26.62
9,761
28.00
Hold
4.7%
16.5x
15.3x
1.5x
1.5x
ADVANCED
2330
41.99
6,886
45.00
Hold
7.1%
9.2x
11.7x
2.8x
2.7x
SAUDI KAYAN
2350
11.15
16,725
12.00
Hold
-
-
1.2x
1.2x
PETRO RABIGH
2380
18.91
16,565
23.00
Buy
-
13.5x
23.9x
1.6x
1.6x
12.6x
12.6x
2.0x
1.9x
Group Average
-
Source: Riyad Capital
|4
Stock Rating
Strong Buy
Buy
Hold
Sell
Not Rated
Expected Total Return ≥ 25%
Expected Total Return ≥ 15%
Expected Total Return < 15%
Overvalued
Under Review/ Restricted
Head Office Riyad Capital P.O. Box 21116 Riyadh 11475 Saudi Arabia Phone 800 124 0010 Website www.riyadcapital.com Email [email protected]
Disclaimer This research document is prepared for the use of clients of Riyad Capital and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Riyad Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Riyad Capital. The information herein was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Riyad Capital make no representations or warranties whatsoever as to the data and information provided and Riyad Capital do not represent that the information content of this document is complete or free from any error. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document.
Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Accordingly, investors may receive back less than originally invested. Riyad Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments. Riyad Capital shall not be liable for any loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document is subject to change without prior notice.”
Riyad Capital is licensed by the Saudi Arabia Capital Markets Authority (No. 07070-37)
