Equity Analysis /
Saudi Arabia

SABIC Agri-Nutrients: Agri-Nutrient deal is a key stock driver

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    6 May 2019
    Published by

    We maintain our Neutral rating on SAFCO with a revised PT of SAR77.6 (previously SAR74.6). Whilst being part of EM indices is supportive in the short-term, higher exports of urea from China is a key risk for urea prices. The stock is trading at 2019f PE of 21.7x, higher than the regional peer group of 15.0x and SAFCO’s historical average of 17.0x, which might be driven by the impact of EM inclusion. Further development on the deal with SABIC will be the key catalyst for the stock.

    Major shutdowns to impact 2019f profitability:  We expect SAFCO’s net income to decline 7.6% yoy to SAR1.6bn. The decline is mainly driven by long shutdowns. Based on SAFCO’s annual reports, SAFCO 3 (capacity of 1.1mn tons) and SAFCO 4 (capacity of 2.4mn tons) will have shutdowns of 117 days and 43 days respectively in H1 19. The aim of the shutdowns is to improve efficiency and increase the total capacity of SAFCO by c4% to 5.97mn tons of urea and ammonia. We expect effective operating rates to decline to 91% in 2019 vs 108% in 2018.

    Urea prices to decline 5% in 2019f: We expect urea prices to decline 5% yoy in 2019f to US$268. Prices were weak during Q1 19 which we believe is mainly due to a surprising increase in exports from China, which jumped 362% from 281,000 tons in Q1 18 to 1.3mn tons in Q1 19. In the past few years, urea exports from China declined after the implementation of environmental related regulations which resulted in major permanent shutdowns in the industry. China’s return to the export market might put pressure on prices, offsetting the potential improvement resulting from limited global supply.

    Feedstock prices to change in 2022f: According to the Fiscal Balance Program (FBP), the feedstock discount for petrochemical producers was planned to be removed between 2020 and 2021. We expect the current price of methane of US$1.5/mmbtu to be adjusted to US$2.5 by 2022f. This is expected to increase SAFCO’s production cost, reducing its margins from 55.2% in 2018 to 49% in 2022f.

    Inclusion to FTSE and MSCI EM indices is a key share price driver: SAFCO is part of FTSE and MSCI EM indices with an estimated weight of 2.4% and 2.5%, respectively. Passive inflows from FTSE are expected to be SAR540mn while those from MSCI are estimated at SAR1.2bn. This represents c79 days of value traded (based on 3 months average daily value traded). We expect the inclusions to continue to support the stock price in 2019f.