Global Research Sector-Petrochemical May 2011
GCC Petrochemical
GCC Petrochemical Sector 1Q11
Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel: (965) 2295-1270
OPEC average prices recorded at USD100.8/barrel in 1Q11; QoQ growth of 20.4% Impressive 1Q11 performance; prices & volumes remained key growth drivers Prices continue to remain key QoQ growth driver in 2Q11 ‘Neutral’ stance on the sector
MENA political unrest lead benchmark crude oil to remain on high level The persisting unrest in the MENA region, during 1Q11, remained a key factor that has led the average prices of all benchmark crude oil above USD90/barrel. Moreoever, during the quarter we have witnessed notable change in WTI/Brent price spread; where the average prices of WTI and UK Brent crude oil were recorded at USD94/barrel and USD103.4/barrel, respectively. Hence, the average prices of basic chemical remained on higher levels with QoQ gain of 30.5%, 22%, 20.3% 7.4% and 1% in ethylene, propylene, benzene, ammonia and urea, respectively, during 1Q11.
Quarterly performance The regional sector witnessed outstanding financial performance in 1Q11, where the profitability (based on our regional petrochemical coverage) was recorded at USD3.1bn. This indicates the regional profitability registered impressive YoY growth of 49.9% and witnessed 27.8% growth on quarterly basis, during the quarter under review. On the other hand, based on our regional petrochemical coverage, the regional sales revenue in 1Q11 witnessed YoY and QoQ growth of 33.5% and 7.6%, respectively. It is noteworthy that the improvement in average prices and volumetric sales remained crucial factors in 1Q11; where higher prices were remained the key driver for QoQ growth. Moreoever, we cannot ignore the positive impact of improvement in operating performance, which has led the regional operating margin to reach at 32.1% in 1Q11 as compared to 29.3% recorded in 4Q10.
Regional political unrest will continue to support prices Global Research believes the additional production from KSA could release some threat of potential supply glitch in international market due to Libyan crisis. However, based on our understanding, the ongoing geopolitical unrest will remain key factor, which will keep the average prices of benchmark crude oil on higher levels in 2Q11; where the average prices of all benchmark crude oil are expected to remain above USD100/bbl. Furthermore, the average prices of OPEC crude oil is expected to remain in the average range of USD103.5/bbl to USD108.5/bbl in 2Q11.
Outlook for 2Q11 Based on our regional coverage, the sector’s net profitability is expected to show QoQ growth of 7.2% in 2Q11, which will translate into YoY expected growth of 55.5%. We believe the expected higher average prices will continue to contribute significant role in expected quarterly growth. Consequently, the primary impact of estimated QoQ gain prices (in 2Q11) will reflect directly on the sector’s sales revenue, which is expected show QoQ and YoY growth of 8.7% and 29.1%, respectively. Moreoever, we are expecting minute QoQ improvement in the regional capacity utilization, on the back of slow improvement in demand and ongoing regional uncertainty. Consequently, the regional gross, operating and net profitability margins are expected to record at 38%, 31% and 22%, respectively, in 2Q11.
Recommendation - Positive We reiterate our neutral stance on the sector with SIPCHEM and IQ as our top pick for the sector in 2Q11. Global Research Petrochemical Coverage
Syed Taimure Akhtar Senior Financial Analyst sakhtar@globalinv.com.sa Tel: (966) 1 299-4105 Global Investment HouseSaudia www.globalinv.com.sa
Ticker
Country
Mkt Cap
Price*
(USDmn)
In (LC)
Stock Performance
Div. Yield
1m
3m
12m
2011e
P/E 2011e
P/BV 2012e
2011e
Earnings Grow th 2012e
2011e
2012e
SABIC
KSA
87,400.0
109.3
1.9%
4.5%
7.1%
2.8%
10.6
9.6
2.4
2.1
44.3%
9.6%
SIPCHEM
KSA
2,072.9
21.2
-8.6%
-0.1%
-6.0%
4.1%
13.4
9.9
1.5
1.4
53.1%
35.5%
SAFCO
KSA
11,966.7
179.5
-0.8%
-6.0%
30.5%
5.5%
12.7
11.7
5.5
4.8
9.6%
7.7%
YANSAB
KSA
7,470.0
49.8
-3.8%
6.9%
7.1%
5.0%
9.9
9.4
0.0
0.0
68.6%
5.4%
IQ
Qatar
22,030.0
147.0
2.4%
-1.6%
35.0%
6.8%
8.8
7.0
2.8
2.3
63.9%
25.8%
Source: Tadawul, Zawya & Global Resercah *Market prices for KSA as of 11th May 2011, while for Qatar market prices are as of 12th May 2011