Equity Analysis /
Saudi Arabia

Sipchem: Muted outlook outweighs synergy benefits, downgrade to Neutral

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    4 September 2019
    Published by

    We downgrade Sipchem to Neutral with a revised target price of SAR19.3 (down from SAR23.9), suggesting upside of 6.6%. The main reasons behind the downgrade are: i) the US-China trade war, and ii) concerns about the health of the global economy, which we believe outweigh the potential synergies from the merger. The stock is trading at a 2020f PE and EV/EBITDA of 12.6x and 10.1x, higher than the global peer group average of 12.3x and 8.7x, respectively.

    Successful merger with synergies of SAR175-225mn: Sipchem and Sahara successfully completed a merger of equals in May 2019. Sipchem issued 0.8356 new shares for each Sahara share, increasing its total number of issued shares to 733mn shares. The merger is expected to result in 1) cost synergies, 2) improved operational efficiency, 3) a well-diversified product portfolio with a combined capacity of 6.57mn tons, and 4) access to new markets. The management estimated a cost synergy of SAR175-225mn to be realised over 2019f-2022f. We expect a cost synergy of SAR100mn to be realized in 2020f and to increase gradually to SAR175mn by 2022f.

    Muted petrochemicals sector outlook: 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. In August 2019, the trade war escalated again to include an additional tariff of 5-25% on a wide range of products, including chemicals. The recovery of the petrochemicals sector relies heavily on a positive outcome of the trade war.

    Net income to grow 32.6% yoy in 2020f: We expect Sipchem’s net income to grow 32.6% yoy to SAR1.05bn in 2020f, driven by 1) full year consolidation of Sahara post-merger and 2) cost efficiency and 3) higher operating rates after shutdowns. In 2019, Sipchem had several long shutdowns at the butanediol, acetic acid, VAM and carbon monoxide facilities.

    Downgrade to Neutral: We downgrade Sipchem to Neutral with a revised PT of SAR19.3 (down from SAR23.9), suggesting upside of 6.6%. Key positives are: 1) synergies benefits; and 2) an attractive dividend yield of 5.5%. However, the ongoing trade-related issues are key downside risks. The stock is trading at a 2020f PE and EV/EBITDA of 12.6x and 10.1x, higher than the global peer group average of 12.3x and 8.7x, respectively.