Improved operational efficiencies and lower risk and multiples expansion as well as lower feedstock cost will drive the net income of the top 10 petrochemical stocks in Saudi Arabia in 2013, a report said.

The total net income of the ten stocks is expected to increase 15.2 per cent year-on-year to SR38.3 billion ($10.2 billion) in 2013 against a decline of 18.5 per cent y-on-y in 2012, said NCB Capital, the GCC’s leading wealth manager and Saudi Arabia’s largest asset manager, in its update on the Kingdom’s petrochemicals sector.

In 2014, the expected improvement in demand and higher earnings from startups are expected to increase net income by 8.5 per cent year-on-year to SR41.5 billion ($11 billion) despite the expected decrease in ethane subsidy, it noted.

“The continued subsidy on feedstock costs, expansion in valuation multiples and lower risk premium has increased our price targets by an average of 6 per cent,” said Iyad Ghulam, equity research analyst at NCB Capital. “However, the slow global economic recovery and subsequent impact on petrochemical demand remains the sector’s key concern."

NCB Capital has downgraded Sipchem and Sahara to Neutral while maintaining all other ratings, remaining Overweight on Sabic, SIIG, Yansab and APPC.

The update downgrades Sipchem and Sahara to Neutral from Overweight off the back of the recent rally in stock prices. Sipchem is up 17.3 per cent, while Sahara is up 10.7 per cent since NCB Capital’s last update in March 2013 compared to a 7.7 per cent increase in TASI.

However, progress in the ongoing merger talks between Sahara and Sipchem is a key catalyst in the near term. Due to the lack of clarity, NCB Capital has not incorporated this into its model.

“We maintain our Overweight ratings on Sabic, SIIG, Yansab and APPC, and our Neutral ratings on Safco, Kayan, Tasnee and Petrochem,” continued Ghulam.

“Our top picks are Sabic and Yansab. Despite its strong growth outlook, Sabic has lagged the market rally while the strong dividend outlook is the key catalyst for Yansab.”

“We have postponed the expected price hike of feedstock to January 2014 from the second quarter of 2013. Although initially planned for the beginning of 2012, we now believe the Ministry of Petroleum and Minerals will not announce a feedstock price hike in 2013,” Ghulam added.

“This delay has positively impacted our valuations on Sabic, Sipchem and Safco by an average of 1-2 per cent while operating income increased by an average of 7 per cent for 2013,” he added. – TradeArabia News Service