Earnings Report /
Saudi Arabia

SABIC: Muted outlook on global economy concerns; maintain Neutral

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    9 August 2019
    Published by

    We remain Neutral on SABIC with a revised PT of SAR96.2. The outlook of the petrochemicals sector is negative due to the US-China trade war, global economic slowdown and increased capacities. This is expected to result in a 44.8% yoy decline in SABIC’s earnings in 2019f, to SAR11.9bn. Moreover, uncertainty regarding feedstock prices in Saudi is a key concern. The stock is trading at 2019f EV/EBITDA of 10.1x, higher than the peer group average of 9.0x.

    Muted outlook with many headwinds: The outlook of the petrochemicals sector has shifted during the past four quarters from positive with high margins to negative with multi year low prices.  The US-China trade war, weakness in the auto industry and excess capacity are putting pressure on petrochemical products demand and prices. Last week, the US imposed a 10% tariff on the remaining Chinese imports with a total value of US$300bn. Although the new list did not add new petrochemical products, prices will be impacted negatively as petrochemicals are used in the production of many downstream products included in the list. Moreover, the auto industry (a major consumer of petrochemicals) reported a decline of 6% yoy in H1 19 due to weaker demand, mainly from China. These reasons, along with new capacity from the US (driven by shale gas) and China (self-sufficiency initiative) are also contributing to the negative outlook. The sector is expected to remain weak in the remaining part of 2019f and in 2020f.

    Net income to decline 44.8% yoy to SAR11.9bn in 2019f: We expect SABIC’s net income in 2019f to decline -44.8% yoy to SAR11.9bn, mainly due to weak prices and lower spreads. Sales are expected to decline -14.0% to SAR145.4bn while gross margin is expected to reach 28.4% in 2019f from 34.1% in 2018. We expect prices to decline by -5% to -38% yoy in 2019 and to remain broadly flat in 2020f. PP-propane spread is expected to reach US$597 (down 11.8% yoy) in 2019f.

    We maintain our Neutral rating on SABIC with a revised PT of SAR96.2. A strong balance sheet, ability to control costs and wide global reach are the stock’s key advantages. However, the muted demand outlook along with the uncertainty regarding feedstock prices are the main risks. Also, the stock is trading at 2019f P/E and EV/EBITDA of 26.4x and 10.1x, respectively, higher than the peer group average of 14.6x and 9.0x, respectively.