Falcom Financial initiates SABIC coverage with ‘neutral’ rating

Falcom Financial Services initiated coverage of Saudi Basic Industries Corp. (SABIC), recommending a ‘neutral’ rating to the company’s shares, with a target price of SAR 105.9.

“Our neutral stance on the stock is based on oversupply in the petrochemicals market, the lack of near-term volume enhancements, and concerns over feedstock price hikes in KSA,” the firm said in a report.

SABIC’s third quarter 2017 earnings, which beat consensus estimates, primarily reflected the higher selling prices and volumes compared to the year-ago period, the report said. Margins moved higher to 35.6 percent as all segments performed well.

SABIC’s large-scale, diversified operations and strong government backing are the key positives, the report said.

Falcom said while SABIC has projects in the pipeline – including ethane steam cracker plant in partnership with Exxon Mobil and oil-to-chemical plant with Saudi Aramco – the projects will likely come on stream in the next five years, limiting volume growth prospects.

However, the petrochemical producer is expected to benefit from a number of plant startups and acquisitions, Falcom said.

“The company’s recent announcements to spend $3 billion to $10 billion on acquisitions over the next five years in agri-nutrients and specialties are well justified by its balance sheet strength, which could further support the high dividend payout,” the report said.