RIYADH – Majority of petrochemical products' prices will remain under pressure in 2012, Al Rajhi Capital said in its latest study on Saudi Basic Industries Corporation (Sabic). The report noted that the average product prices for key petrochemical products declined by about 10-15 percent on a y-o-y basis during Q2 mainly due to the weaker demand environment and escalating eurozone crisis. Average prices of major petrochemical products declined sequentially (ethylene 14 percent and polyethylene 8 percent). Al Rajhi Capital expects average product prices to contract further by 2-5 percent over the next two quarters owing to weaker demand from China, sufficient supply, and continued uncertain global economic outlook. Methanol prices can remain resilient to price declines due to higher demand for fuel blending. On the other hand, we estimate ammonia and urea prices to increase by 2-3 percent in H2 2012 on account of strong demand, especially from the emerging markets. It further noted that it might revise estimates in the event of any major macroeconomic developments in the US or Europe, which could severely affect crude prices. The report moreover said Sabic's two major subsidiaries - Saudi Kayan and Safco - posted weak Q2 earnings due to operational issues and maintenance shutdowns respectively, which affected Sabic's quarterly performance. Saudi Kayan reported a loss of SR328 million (our expectations: profit of SR178 million), while Safco posted a net profit of SR784 million, which was 22 percent below Al Rajhi Capital's estimates. Saudi Kayan continued to disappoint the markets by posting another loss after it commenced production in Q4 2011. Although the company blamed lower selling prices, higher production costs and SG&A expenses for the Q2 loss, we believe that lower operating rates can also be one of the key reasons. Saudi Kayan is clearly struggling to improve its operational performance, which convinces us to remain cautious on the company over the near-term. The report does not expect any material improvement in performance from Saudi Kayan in H2 2012. Safco reported weak Q2 2012 earnings due to an undisclosed maintenance shutdown as a result of which the company failed to capitalize on strong fertilizer prices. Despite this maintenance shutdown, however, "we expect the company to achieve near 100 percent operating rates in Q3 and Q4, considering its healthy utilization rates in the past few quarters." The report forecast Sabic's performance to improve in Q3 as operating rates at Safco and other facilities will improve in Q3 post a scheduled turnaround in Q2. Revenue was projected to be 2.4 percent lower q-0-q at SR45.4 billion due to lower contribution from the petrochemical segment (which dominates the revenue mix) owing to weak product prices. However, net profit is estimated to reach SR5.6 billion (up 6.2 percent q-o-q) on the back of increased contribution from the high-margin fertilizer segment. Al Rajhi retained its Overweight rating on Sabic with a revised target price of SR107.5 (previous target of SR113.4 per share), implying a 20.5 percent upside from the current levels. Sabic currently trades at 2012 P/E and EV/EBITDA multiples of 11.1x and 7.0x, respectively. – SG
