Higher prices and improved demand outlook are expected to increase the 2014 year-on-year earnings of top 10 Saudi Arabian petrochemical companies to SR42.5 billion ($11.3 billion), a report said.

The sector will also benefit from contribution from new projects and improved operational efficiency for most of the stocks under coverage, added the end-of-year update on the Saudi petrochemicals sector, released by NCB Capital, the GCC’s leading wealth manager and the Saudi Arabia’s largest asset manager.

“We remain Overweight on Sabic, SIIG, Tasnee, Yansab and Advanced, while maintaining all other ratings. Higher petrochemicals prices driven by improved demand outlook, continued feedstock advantage, new start-ups and operational efficiency are expected to increase 2014 earnings by 21 per cent year-on-year,” commented Iyad Ghulam, equity research analyst at NCB Capital.

“We have revised petrochemical demand and price estimates higher for 2014E by an average 11 per cent, driven by improving economic conditions in developed and emerging markets. Increasing industrial production, auto sales and housing market in the US and Europe is expected to continue to drive petrochemicals demand. Moreover, the increase in Chinese exports is expected to mitigate the impact of any softening of the economy.

“We have delayed the expected change of feedstock prices from 2014E to 2015E. The natural gas, which is supplied by Aramco at $0.75/mmbtu, was expected to double in 2014. However, no official announcement was made and therefore we postpone the increase to 2015. As a result, 2014E earnings estimates and valuations of most of the ten stocks under our coverage have been revised up by an average of 6 per cent and 1 per cent respectively due to this delay.”

NCB Capital remains Overweight on Sabic, SIIG, Tasnee, Yansab and Advanced, and Neutral on the remaining stocks under coverage. On average, the PTs are up 15 per cent due to higher petrochemicals prices, operational efficiency, start-ups, and delay in revision of ethane prices.

“Our top picks are Tasnee and SIIG. Improved demand and pricing outlook for petrochemicals and TiO2 increase our confidence on Tasnee,” stated Ghulam.

“While SIIG‘s valuation remains attractive driven by strong earnings from SCP /JCP, the start-up of nylon 6.6 project and the increase in Petrochem’s earnings will support earnings growth,” he added. – TradeArabia News Service