HSBC lists SABIC, Yansab as preferred stocks in ‘volatile’ chemicals market

HSBC listed (SABIC), Sipchem, and Yanbu National Petrochemical Co. (Yansab) as preferred stocks, while slashing earnings estimates of Saudi chemical companies by an average 18 percent on increased feedstock prices for methane, ethane, and natural gas.

HSBC cut SABIC’s target price to SAR 100 from SAR 110, noting that higher fuel prices will not have much impact on the kingdom’s largest petchem producer. SABIC stocks have the “ability to sustain a dividend of SAR 5 implying a 6.3% yield at current prices,” the bank said.

Sipchem’s target price was lowered to SAR 22 from SAR 28, on limited impact due to heavy methane feed mix.

The target price for Yansab fell to SAR 45 from SAR 60.

“New sustainable dividend of SAR 2.5 implies a yield of 7.4 percent,” the bank added.

Companies with heavier feedstock mixes, relatively low profitability, low operating rates, and high selling, general and administrative expenses (SG&A) will be hit the hardest by the recent revision in prices.

Sahara, Petrochem, Petro Rabigh and Kayan are likely to feel the most impact of the price hikes.

The target price for Sahara was revised to SAR 11.5 from SAR 14; Petrochem target share price was lowered to SAR 17 from SAR 23; Petro Rabigh was cut to SAR 15 from SAR 23; and Saudi Kayan’s target price was slashed to SAR 7.5 from SAR 10.

While the increase in feedstock prices will not affect the competitiveness of Saudi companies in relation to international peers, it will, however, hit their product profit margins by 4-7ppts, the report said.

“Unit costs of production across most major product lines will increase by $11-60 per ton,” HSBC added.

On Monday, the Saudi government cut subsidies and raised energy prices after posting an expected budget deficit of SAR 326 billion in 2016, and slashing next year’s expenditures by 14 percent.

“Gas price increases were expected and are below Henry Hub prices in the US. NGL discount cuts were unexpected, as Saudi propane was already higher than equivalent US prices,” HSBC said.