SICO revises SAFCO rating to Buy on strong urea outlook

Bahrain-based SICO Investment Bank has revised its rating on Saudi Arabia Fertilizers Co. to Buy from Sell, with a target price of SAR 90, amid a stronger outlook for urea going forward.

“We believe that the urea outlook is favorable over the next 2- 3 quarters due to positive demand outlook and balanced to tight markets on the supply side,” SICO said in a note to investors on Monday.

Accordingly, the investment bank expects the recent rebound in urea prices (from $235/ton in May 2018 to $350/ton in September 2018) to be sustainable over the coming quarters with an upside risk of further improvement.

SAFCO’s earnings are “highly leveraged” to urea prices, given a fixed cost structure with the main feedstock component, gas prices, fixed at $1.25 per million British thermal units (mmbtu).

“Consequently, higher urea prices feed directly into its margins,” SICO noted, adding that every 10 percent increase in urea prices translates into a 20 percent increase in earnings per share (EPS). 

The brokerage expects robust earnings for SAFCO in the third quarter, at $285/ton urea realization price. SAFCO is forecast to make SAR 497 million in Q3 net profit, an increase of 164 percent year-on-year and 21 percent quarter-on-quarter.