Source: Rasmala Investment Co. (RASMALA)
Look beyond 1H12
We expect a relatively weak start to 2012, but expect a recovery in petrochemical demand and margins in the second half of the year. SABIC has strong leverage to improving economic growth. We believe the stock is cheap at 5.3x 2012F EV/EBITDA, and we maintain our Buy recommendation.
Event: 4Q11 results below expectations, but we reiterate our Buy recommendation
Following SABIC’s 4Q11 results, we adjust our forecasts and maintain our Buy recommendation. 4Q11 revenues of SAR47bn were in line with our forecast, but 4Q11 net income was 18% below our forecast and full-year net income 4% below, although we were at the lower end of the consensus range. SABIC cited a lower pricing environment as the main reason behind the 36% qoq decline in net income and 20% drop in gross profit, despite an increase in sales volumes. We believe margins have suffered as oil prices remained high in the 4Q, but petrochemical prices dropped in 4Q11. The average ethylene and LDPE prices were down as much as 10% in 4Q11 versus 3Q11, as customers have been careful about restocking inventories and producers were unable to pass on high raw material costs. We believe SABIC’s operations in Europe in particular are likely to have been affected.
Valuation: SABIC should be a core holding in the Saudi Arabian stock market
As a result of our downgrade for 2012, we reduce our target price slightly, from SR115 to SR113/share. We use a DCF analysis (WACC 10%, g=2%, beta 1.1x) to value the stock and cross-check with peer multiples. Current valuation multiples of 5.3x 2012F EV/EBITDA and 9.8x PE and 2012F target EV/EBITDA of 6.3x and PE of 11.9x look cheap compared with peers and historical values, further supported by a dividend yield exceeding 5%. Key risks to our investment case are a substantial drop in oil prices, worse-than-expected global GDP growth resulting in weak demand for SABIC’s products, increases in feedstock costs in Saudi Arabia and political risk in the Middle East.