HSBC cuts valuations for MENA petchem stocks; SABIC, Yansab preferred

HSBC has picked Saudi Basic Industries Corp (SABIC) and Yansab (Yanbu National Petrochemical Co.) as the preferred stocks among MENA petrochemical firms on strong valuation.

Despite volatile oil prices and investors’ fear over the economic slowdown in China, the sector fundamentals remain strong with more room for cuts to support growth estimates, HSBC said in a sector report Tuesday.

“We find the risk reward for owning MENA chemical stocks at current levels attractive,” Sriharsha Pappu, the analyst said in the report.

Saudi Basic Industries Corp (SABIC) and Yansab (Yanbu National Petrochemical Co.) are among the preferred stocks on strong valuation.

SABIC’s target price is cut to SAR 110 from SAR 120. HSBC said the company has the financial strength and the cost position to weather a period of lower oil prices and weaker Chinese demand.

Yansab has maintained its target price of SAR 60. The company is an exceptional cash generation— and, over time, a strong dividend-growth story, the bank noted.

“We continue to prefer strong cash flow, high dividend yield names such as SABIC and Yansab. PetroRabigh, SIIG, Sipchem, Tasnee and Sidi Kerir are the other buy rated names within our coverage,’’ Pappu said.

Sipchem has a reduced target price of SAR 30 from SAR 40. The bank sees volume growth and a return to free cash flow generation driven by an end to growth capex and strong return profile of the new EVA/LLDPE plant.

On SIIG, the bank cut its target share price to SAR 28 from SAR 31 noting that volume and earnings growth for SIIG set to continue as a result of better operational performance at its Saudi Polymers subsidiary.

Tasnee has a reduced target price of SAR 20 from SAR 24.

“At current prices Tasnee offers investors a significant margin of safety as well as leverage to strong chemical margins and any potential recovery in TiO2 fundamentals,” the bank said.

Egypt’s Sidi Kerir has had its target price cut to EGP 17 from EGP 18. It is essentially a fixed-percentage margin business as feedstock pricing is driven by a formula linked to ethylene and polyethylene prices.

Petro Rabigh’s target price is cut to SAR 25 from SAR 29.  The company has addressed issues related to its lossmaking refinery, taken a big step towards improving operations at its chemical unit, and provided greater clarity around growth opportunities related to Rabigh 2.