Lower prices weigh on petchem sector in Q1 2019: Al Rajhi Capital

The Saudi petrochemical sector’s combined earnings in the first quarter of 2019 dropped around 40 percent year-on-year (YoY), due to lower product prices amid weak demand, Al Rajhi Capital said in a sector review.

Saudi Basic Industries Corporation (SABIC) accounted for 62 percent of the sector’s decline in earnings.

Weak oil prices in Q1 and slowing global economic growth weighed on petchem products prices, with polymer prices dropping in the range of 10-20 percent YoY, the report said. An increase in feedstock prices also remains a key risk for petrochemical companies.

Lower prices, however, were partly offset by a decline in feedstock prices, as most companies under Al Rajhi Capital’s coverage saw profits decline on lower top-line.

Market heavyweight SABIC reported a 38 percent YoY decline in earnings, mainly due to a lower top-line.

Yansab’s net profit also dropped 38 percent YoY on lower-than-expected utilization and higher cost of goods sold.

Tasnee and Sipchem also reported 56 percent and 24 percent YoY declines in Q1 earnings, respectively, on lower product spreads.

Meanwhile, APCC and SAFCO’s earnings jumped 66 percent and 41 percent YoY, respectively, due to improved production efficiencies, despite a shutdown of some plants.

“Being at the low end of the cost curve Saudi petchem firms are price takers and with eventual increase in product prices, emphasis on dividend yields would be one of the better strategies,” the brokerage said.

Al Rajhi Capital revised stocks estimates under coverage, lowering target prices.

It recommended a “neutral” rating on SABIC’s stock, with a target price of SAR 115 per share, while Sipchem was rated “overweight” at SAR 24 per share.

SAFCO’s stock was seen “neutral” at SAR 78 per share. Yansab and Advanced Petrochemical Company were rated “neutral,” with target prices of SAR 70 and SAR 57 per share, respectively.