Saudi Basic Industries Corporation -Equity Report -02-08-2012

Higher utilization to boost H2

SABIC reported surprisingly weak Q2 earnings of SAR5.3bn, which is significantly below our (SAR6.7bn) as well as consensus estimates (SAR6.8bn) owing to undisclosed maintenance at some of its facilities. Further, weak petrochemical prices as well as maintenance activities at one of its subsidiaries, SAFCO also affected SABIC’s Q2 performance. We believe product prices will remain subdued in H2 2012. That said, we expect SABIC to improve its Q3 performance on the back of better utilization rates. We remain positive on SABIC since it occupies a market leader position with a diversified product portfolio. We reiterate our Overweight rating on the stock with a revised target price of SAR107.5 per share.

Valuation and conclusion: We have marginally revised our earnings estimates downwards following weaker-than-expected Q2 results and lower product prices. That said, we retain our Overweight rating on SABIC with a revised target price of SAR107.5 (previous target of SAR113.4 per share), implying a 20.5% upside from the current levels. SABIC currently trades at 2012 P/E and EV/EBITDA multiples of 11.1x and 7.0x, respectively.