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Operational efficiencies to drive earnings of petchem companies

In its latest update on the petrochemicals sector, NCB Capital believes an improvement in demand for petrochemicals and enhanced operational performance will be the key drivers for sector growth in 2014.
“However, YTD volatility in global demand and ongoing efficiency concerns remain. This has led to the reduction of our YoY earnings growth by 250 bps to 18.5 percent YoY in 2014 to reach SR40.6 billion, said Iyad Ghulam, equity research analyst at NCB Capital.
“The global economy was volatile during Q1, 2014 due mainly to weak US data and the tensions in Ukraine. The US retail sales declined 0.6 percent MoM in January while jobs data came in weaker than expected. The poor data for the start of the year was mainly attributed to the colder than expected winter.
“Subsequently, the data points have indicated a pick-up in activity supporting our positive view on a recovery in the global economy. On the other hand, continuing tensions in Ukraine pose another threat to the petrochemical sector specifically and could negatively impact the global economy if the situation escalates.”
NCB Capital remains overweight on Saudi Basic Industries Corporation (SABIC), SIIG, Tansee, Yansab and Advanced, and neutral on SAFCO, Kayan, Sipchem, Sahara and Petrochem. “Our top pick is Tasnee,” stated Ghulam.
“Strong earnings outlook for 2014 driven by higher margins for TiO2 and petrochemicals segments; new startups; and an attractive valuation are the main reasons behind our preference for the stock.”

NCB Capital remains overweight on Tasnee with a PT of SR37.8. Strong earnings outlook off the back of the anticipated improvement in the titanium business, better efficiency in the petrochemicals business and contribution from the new projects in 2014 are the key drivers for the stock in the short term. The stock is trading at an attractive 2014 P/E of 10x compared to its peers at 14.1x

NCB Capital remains overweight on SABIC with a revised PT of SR133.7. SABIC is well placed to benefit from improving demand conditions due to its sustained focus on expansion, diversified product mix and wide geographical presence. A strong balance sheet raises the possibility of increasing dividends and/or acquisition in the near to medium term.
“We remain overweight on SIIG with a revised PT of SR38.1,” said Ghulam. “In 2014, earnings estimates are expected to double reaching SR1.4 billion. This is largely driven by the contribution of Petrochem. However, the ongoing operational issues remain a key concern in the short-run. The stock is trading at an attractive 2014 P/E of 10.2x against 14.1x for the sector. We believe Petrochem’s operational progress is the key driver for the stock.”

Advanced Petrochemicals
“We remain overweight on Advanced with a revised PT of SR48.5,” commented Ghulam. “Our PT increased by 5.4 percent due to the addition of the new project to our model and the increase in operating rates to 119 percent from 108 percent. The stock is trading at a 2014 P/E of 12.2x compared to 14.1x for the sector. It also has an attractive dividend yield of 5.4 percent. However, we believe the new expansion will limit the dividends growth ability of the company.”