SABIC net profit likely to drop to SAR 12 bln in 2019: NCBC

Saudi Basic Industries Corporation (SABIC) is expected to post a 44.8 percent earnings decline year-on-year (YoY) in 2019, to SAR 11.9 billion, on a negative outlook of the petrochemicals sector, the US-China trade war, global economic slowdown and increased capacities, NCB Capital said in a note.

"The sector is expected to remain weak in the remaining period of 2019 and in 2020; we expect SABIC’s net income in 2019 to decline -44.8 percent YoY to SAR 11.9 billion, mainly due to weak prices and lower spreads," NCB Cap stated.

"We remain Neutral on SABIC with a revised target price of SAR 96.2," the brokerage added.

The outlook of the petrochemicals sector shifted during the past four quarters from positive with high margins to negative with multi year low prices. The US-China trade war, weakness in the auto industry and excess capacity are putting pressure on petrochemical products demand and prices.

Last week, the US imposed a 10 percent tariff on the remaining Chinese imports with a total value of $300 billion. Although the new list did not add new petrochemical products, prices will be impacted negatively as petrochemicals are used in the production of many downstream products included in the list.

The auto industry, a major consumer of petrochemicals, also reported a decline of 6 percent  YoY in H1 2019 due to weaker demand, mainly from China.

The sales of 2019 are expected to decline -14.0 percent to SAR 145.4 billion while gross margin is seen to reach 28.4 percent in 2019 from 34.1 percent in 2018.

"For SABIC, we expect margins to decline from 28.4 percent in 2019 to 26.5 percent in 2023," NCB Cap stated.

Saudi Aramco has signed earlier an agreement with the Public Pension Fund (PIF) to acquire its 70 percent stake in SABIC for SAR 259 billion.

"We expect the transaction to benefit PIF, Aramco and SABIC. For SABIC the key advantages are 1) feedstock availability, 2) access to new technology 3) higher integration between the facilities and 4) exposure to new markets," NCB Cap added.