Saudi Arabian Petrochemicals 1Q2016 Preview

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1 April 4, 2016 New Low for Oil in 1Q Oil markets witnessed a depressing start to 2016 with Brent prices hitting a 12-year low of under USD 28/bbl which shook Saudi equities to the core. TASI hit a decade low of 5,459 points as investors grappled with fears of further doom in crude. Nevertheless, Brent has managed to recover and now trades around the USD 40/bbl mark as we end the first quarter. Petrochemical prices have followed a similar pattern. A modest recovery was witnessed in TASI but a large recovery was in place for the oil market. We find it positive that petrochemical prices did not blindly follow oil and hit rock bottom. As a matter of fact average prices of ethylene fell just -6% Q/Q while propylene declined -9% Q/Q in 1Q2016. Oil has recovered nearly +49%, TASI touched a high of 6,486 points and the petrochemical index (TPCHEM) has outperformed the TASI. Ethylene and propylene averaged USD 833/ton and USD 520/ton respectively for the quarter, in effect sustaining the oil price crash. Methanol prices fell further this quarter, down to USD 255/ton in March after averaging USD 305/ton during 4Q2015 and USD 342/ton during full year Brent plummeted to USD 28/bbl, but registered an average at USD 36/bbl in 1Q2016 versus USD 55/bbl for Exhibit 1: Petrochemicals Prices (USD/ton) 1,400 1,200 1, Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Propylene Ethylene Source: Bloomberg Urea prices continue to be beaten back, recorded lows of USD195/ton but averaged USD 211/ton in 1Q, witnessing a decline of -18% Q/Q as compared to average prices of USD 257/ton in 4Q. Ammonia prices witnessed a sharp decline of -31% Q/Q to an average of USD 308/ton versus USD 447/ton last quarter. Despite being complementary commodities, 2015 has witnessed urea and ammonia move in opposite directions. Muhammad Faisal Potrik muhammed.faisal@riyadcapital.com Yasser bin Ahmed yasser.bin.ahmed@riyadcapital.com Riyad Capital is licensed by the Saudi Arabia 1 Capital Markets Authority (No )

2 Exhibit 2: Urea and Ammonia Prices (USD/ton) Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Urea Ammonia Source: Bloomberg On a Q/Q basis, ethylene is down -6% while propylene declined by -9%. However, Brent crude is -22% lower Q/Q although it bounced back on falling rig counts and key producers entering an output freeze as we ended first quarter. We note with concern that urea prices have touched its lowest levels since 2008, down -18% Q/Q to an average of USD 211/ton. Exhibit 3: Quarterly Average Commodity Prices (USD/ton) 1, , , Q15 2Q15 3Q15 4Q15 1Q16 Ethylene Propylene Urea Brent Crude (USD/bbl) 0 Source: Bloomberg 2

3 1Q Expectations Table 1 below details our 1Q2016 forecasts for petrochemical stocks under coverage. Revenues of our coverage universe are expected to decline -18% Y/Y on the back of lower oil and petrochemical prices. This time we do not expect any exception to the rule with a broad based decline in revenues and net income for all companies. Besides lower prices, we have also incorporated the estimated impact of higher energy prices and feedstock costs for the affected companies. Some operators such as Saudi Kayan, Sipchem and Yansab will continue to benefit from subsidized feedstock for some time due to their pending agreements with Aramco. We expect SABIC to record a -9% decline in revenues but -27% lower bottom line Y/Y to SAR 2.9 billion as higher input costs eat into margins. With slump in urea exacerbating this quarter, Safco is likely to post -28% lower revenues while EPS is likely to be slashed by -41% Y/Y to SAR Saudi Kayan started its maintenance shutdown one month ahead of schedule from March 1 st. We forecast both Kayan and Petro Rabigh to post a net loss in 1Q2016 to the tune of SAR (318) million and SAR (193) million respectively. We believe SIIG to witness a relatively better quarter, after its 37-day shutdown in 4Q2015 and expect a decent performance from associates JCP and SCP. On the other hand, Advanced is expected to have higher operating rates improvising margins, while revenue to be lower as PP prices declined by -9% Q/Q. Net income is estimated to drop by -29% Y/Y over the comparable quarter last year on average for stocks under our coverage with Sahara as the only one which is expected to go from a loss last year to profit this year. Table 1: 1Q2016 Estimates (SAR mln, except per share data) Revenues EBIT Net Income EPS Company 1Q2015 1Q2016E Y/Y Chg 1Q2015 1Q2016E Y/Y Chg 1Q2015 1Q2016E Y/Y Chg 1Q2015 1Q2016E PETROCHEM 1,771 1,476-17% % % SABIC 35,564 32,449-9% 6,126 4,287-30% 3,935 2,888-27% SAFCO % % % SIIG 1,771 1,476-17% % % SAHARA % (1,238) 36 na (50) 33 na (0.11) 0.22 YANSAB 1,717 1,657-3% % % SIPCHEM % % % ADVANCED % % % SAUDI KAYAN 1,753 1,729-1% (443) (167) na (592) (318) na (0.39) (0.21) PETRO RABIGH 7,648 2,210-71% 225 (202) na 205 (193) na 0.23 (0.22) Group Total 52,741 43,230-18% 6,357 5,416-15% 4,772 3,389-29% Source: Riyad Capital, Company Reports We forecast 1Q gross margins to be flat on average for our universe as some producers witness an expansion and others a contraction in margins. However, both EBIT and net margins are expected to be lower Y/Y by 100bps and 300bps respectively as lower product prices and higher energy costs impact producers. 3

4 Table 2: 1Q2016 Margin Estimates Gross EBIT Net Company 1Q2015 1Q2016E 1Q2015 1Q2016E 1Q2015 1Q2016E PETROCHEM 25% 32% 13% 21% 6% 11% SABIC 27% 26% 17% 13% 11% 9% SAFCO 63% 48% 61% 45% 61% 51% SIIG 25% 32% 13% 25% 7% 8% SAHARA 9% 27% na 12% na 11% YANSAB 24% 25% 21% 21% 17% 17% SIPCHEM 28% 17% 21% 8% 10% 3% ADVANCED 24% 28% 21% 26% 19% 26% SAUDI KAYAN -21% -3% -25% -10% -34% -18% PETRO RABIGH 8% 3% 3% -9% 3% -37% Group Average 26% 26% 16% 15% 11% 8% Source: Riyad Capital, Company Reports Our coverage universe trades at a forward P/E of 15.8x, higher than estimated forward market P/E of 1.21x although forward P/B valuations are reasonable at 1.3x. Petrochem, SIIG, Sahara, Yansab and Petro Rabigh make it to our Buy list while we recommend a Hold on the remaining. Table 3: Ratings and Valuations (SAR mln) TASI Current Market Target Dividend P / E P/B Company Code Price Cap Price Rating Yield E E PETROCHEM , Buy 3.0% 8.8x 9.2x 1.4x 1.3x SABIC , Hold 5.4% 11.1x 16.7x 1.0x 1.1x SAFCO , Hold 7.8% 12.6x 13.4x 3.0x 2.9x SIIG , Buy 8.2% 7.5x 8.3x 0.8x 0.8x SAHARA , Buy 4.8% 94.2x 21.3x 0.4x 0.4x YANSAB , Buy 5.1% 18.1x 20.1x 1.4x 1.4x SIPCHEM , Hold 3.8% 26.1x 26.1x 0.8x 0.8x ADVANCED , Hold 6.7% 9.4x 11.0x 2.6x 2.5x SAUDI KAYAN , Hold - na na 0.6x 0.6x PETRO RABIGH , Buy - na na 1.1x 1.2x Group Average 23.5x 15.8x 1.3x 1.3x Source: Riyad Capital Exhibit 4 below illustrates the stock price movement of our coverage universe versus the TASI and the Petrochemical index (TPCHEM). The Petchem index outperformed the broader index by +3.7% as petrochemical stocks had taken a big beating in the downturn and the recovery in oil prices gave investors reason to rejoice and pump up petchem stocks. Individual stock performance was mixed. Although six of the stock underperformed the TASI, heavy weight SABIC outperformed along with Yansab, Advnaced, Sipchem and Petrochem resulting in good performance by the sector as a whole. 4

5 Exhibit 4: 1Q2016 Petrochemical sector vs. TASI performance 20.0% 15.0% YANSAB 10.0% ADVANCED 5.0% 0.0% PETROCHEM -5.0% SABIC SIPCHEM TPCHEM -10.0% -15.0% TASNEE SIIG TASI -20.0% SAFCO SAHARA RABIGH -25.0% -30.0% KAYAN Source: Tadawul 5

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