(MENAFN - Arab News) NCB Capital, Saudi Arabia's major wealth manager, expects continued growth in the petrochemical sector's earnings in 2012, though at a slower pace. In a new report issued yesterday, NCB Capital highlighted that despite the anticipated weakness in demand and prices of petrochemicals, the sector's earnings are expected to be supported by the full year contribution from Saudi Kayan and Sahara's Al-Waha plants, as well as the prevailing feedstock advantage.
"In our opinion, a strong rebound in demand in the near term is unlikely given the ongoing debt concerns in Europe and the slowdown in China's GDP growth," said Tariq Al-Alaiwat, equity research analyst at NCB Capital commenting on the report. "As a result, we believe the pricing of petrochemical products may come under pressure in the short run. Nevertheless, we believe petrochemical producers in the Kingdom remain relatively well placed to overcome these challenges by capitalizing on their low cost of production and their exposure to the Asian markets where growth in demand remains stronger than in the western world."
Despite the lower prices YoY expected in 2012, NCB Capital forecasts the net income for stocks under its coverage to increase 9.1 percent YoY to SR43.4 billion in 2012. This is mainly due to an expansion in the production base with the commencement of Saudi Kayan in October and Sahara's Al-Waha plant in April, both in 2011. Though lower prices are likely to limit earnings growth, low production cost and proximity to Asian markets will also support earnings in 2012.
NCB Capital reiterates its Overweight ratings on SABIC, Sipchem and SAFCO. However, the report downgraded Saudi Kayan to Neutral from Overweight off the back a downward revision in operating rate assumptions. NCB Capital downgraded Petrochem to Underweight from Neutral given the recent 17 percent rally over the last 3 weeks (compared to the 8 percent gain in the TASI), which we find to be unwarranted. NCB Capital reiterates its Neutral ratings on Yansab, Sahara and Tasnee.
The Saudi petrochemical sector's net income increased 38.5 percent YoY to SR40.9 billion in 2011, driven by higher prices of petrochemicals and fertilizers along with increased production volumes. SABIC, which recorded a 35.8 percent YoY net income growth, accounted for 71.4 percent of the sector's net income during the year. The start up of Sahara's Al-Waha facility and the full year contribution from Yansab and Sipchem's Phase II helped volume growth in 2011 when compared to the previous year. However, reduced earnings from PetroRabigh along with a loss reported by Saudi Kayan, Petrochem, Alujain and Nama Chemicals held back growth in 2011.
According to the report, Petrochemical prices have shown mixed performance YTD. NCB Capital estimates overall prices to remain flat QoQ in Q1, 2012 on account of unchanged demand and supply outlook. Nevertheless, improved operating rates (QoQ) at Saudi Kayan's petrochemical complex are expected to be a key earnings driver in Q1, 12. NCB Capital believes Saudi Kayan is currently running its plants at an operating rate of around 70 percent, significantly higher than the 30 percent - 40 percent in Q4, 11.
The International Monetary Fund (IMF) revised its 2012 and 2013 estimates down for all key geographies in the January 2012 edition of its World Economic Outlook. Escalating concerns over the European debt crisis and a slowdown in growth in emerging economies during 2011 impacted the global economic outlook. The Chinese economy is projected to grow 8.2 percent (lower than the 9 percent estimated earlier), while the Indian economy is forecasted to grow 7.0 percent in 2012 (down 0.5 percent from the earlier estimate). Overall, global GDP is expected to increase 3.3 percent in 2012 and 3.9 percent in 2013 from 3.8 percent in 2011.