Petrochemical outlook: NCB Capital expects improvement in demand



Despite the volatility in the global economy during the first half of 2014, NCB Capital, the GCC’s major wealth manager and the Kingdom’s largest asset manager, continues to believe that improvement in demand, mainly from advanced economies, and higher operational efficiencies will drive the sector’s 2014 and 2015 expected growth.

Iyad Ghulam, equity research analyst at NCB Capital, said: “We believe the anticipated improvement in the United States and the European economies will support growth in the second half of 2014. The increase in industrial production, auto sales and positive GDP growth outlook are set to increase petrochemical demand in the coming quarters.

“We expect the total net income of the ten stocks under coverage to increase by 11.7 percent YoY to SR38.3 billion in 2014 and 14.8 percent YoY to SR43.9 billion in 2015, against 2.9 percent growth in 2013. This growth will be driven by earnings from Petrochem and Kayan, and higher margins.

The sector margins are expected to increase by 50 bps YoY to 22.5 percent. “However, our 2014 estimates were revised lower by 6 percent due to weak Q1, 2014 results and delay in new startups.”
NCB Capital downgrades advanced petrochemicals to neutral from overweight with a revised PT of SR49.8. “The stock gained 59 percent since we upgraded it to overweight in March 2013, outperforming the TASI by 21.4 percent. It is currently trading at a 2015 P/E of 12.1x, in-line with the sector average,” explained Ghulam. “Although we remain positive on the company’s earnings and dividend outlook, we believe the stock offers limited upside at the current levels.”

NCB Capital remains overweight on SABIC, SIIG, Yansab and Tasnee, and neutral on the remaining stocks under coverage. “Our top picks are Tasnee and SIIG,” highlighted Ghulam. “Increasing operating margins of industrial and petrochemical segments, and the attractive valuation (2014 P/E of 11.7x vs. sector average of 14.7x) are Tasnee’s key positives. Also, Petrochem’s improving operational efficiency is expected to increase SIIG’s 2015 net income by 37.3 percent indicating, an attractive 2014 P/E of 11.9x.”

The global economy was mixed in H1, 2014. The US economy was impacted by severe winter conditions during Q1 2014 but started to improve in Q2, 2014. Slow growth, low inflation and the Ukrainian tension have impacted the performance of the European economy, which in turn forced the ECB to implement new monetary measures. NCB Capital expects the global economy to improve in H2, 2014 driven by the continuous support of the Fed and the ECB.

According to the IMF’s April 2014 report, the global GDP is expected to grow by 3.6 percent in 2014 and 3.9 percent in 2015, higher than 3 percent recorded in 2013.

Despite the reduction in the IMF growth estimates for 2014, NCB Capital says it believes that higher employment, credit policies easing, increasing home prices and improving capital market are expected to help the US economy to expand in the next quarters. Moreover, the euro zone economies are expected to recover supported by rising exports, investments and the recent measures implemented by the ECB.






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