The Saudi petrochemicals sector is going through an interesting period, as it is simultaneously facing major headwinds and attractive opportunities. Slowing global economic growth, supply-chain disruptions, new capacities and high feedstock prices are the sector’s main challenges. On the other hand, the ease of China’s lockdown has improved sentiments and will support outlook. We prefer companies with 1) favourable product mix, 2) feedstock advantage 3) low debt levels and 4) attractive dividend yield. Accordingly, we upgrade Sipchem, SABIC-AN and Yansab to OW while we downgrade Kayan to Neutral.
Global challenges and attractive opportunities: The global economy is facing major headwinds in 2022f, arising from the Russia-Ukraine conflict, China lockdowns and prolonged supply chain issues. This has further increased inflation to reach multi-year highs and impact global GDP growth. According to IMF, the global GDP growth is projected to slowdown from 6.1% in 2021 to 3.6% in 2022f. However, the early signs of easing lockdown restrictions in China and the relative improvement in auto semiconductor shortages improve sentiments and outlook.
2022f earnings: normalization after a record year: The year 2021 was an extraordinary year for the sector, with a net income of SAR39.1bn vs SAR1.9bn in 2020, driven by high product prices and strong market dynamics. In 2022f, we expect the sector’s earnings to remain broadly flat yoy. Higher feedstock prices have broad-base impact on the sector, however, it will be mitigated by strong earnings from SABIC-AN and Sipchem (64.2% yoy, 14.4% yoy, respectively) due to favourable product mix and feedstock.
Selected exposure with unique characteristics: We are Neutral on the sector and prefer stocks with 1) favourable product mix, 2) feedstock advantage 3) strong balance sheet and 4) attractive dividends yield. We upgrade Sipchem, SABIC-AN and Yansab to Overweight, while we downgrade Kayan to Neutral. Sipchem’s unique product offering and feedstock advantage are the key strengths. For SABIC-AN, we believe strong urea prices along with favourable feedstock are the key short to medium term drivers. Despite the short-term challenges, we see Yansab as a longer term pick supported by strong balance sheet and attractive dividend yield of 5.5%. We downgrade Kayan to Neutral due to feedstock disadvantage and highly leveraged balance sheet of SAR13.0bn.