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 2015. Brent plummeted to USD 28/bbl, but registered an average at USD 36/bbl in 1Q2016 versus USD 55/bbl for 2015. Exhibit 1: Petrochemicals Prices (USD/ton) 1,400 1,200 1,000 800 600 400 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 +966-11-203-6807 Yasser bin Ahmed yasser.bin.ahmed@riyadcapital.com +966-11-203-6805 Riyad Capital is licensed by the Saudi Arabia 1 Capital Markets Authority (No. 07070-37)
Exhibit 2: Urea and Ammonia Prices (USD/ton) 500 400 300 200 100 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) 1,400 70 1,200 60 1,000 50 800 40 600 30 400 20 200 10 0 1Q15 2Q15 3Q15 4Q15 1Q16 Ethylene Propylene Urea Brent Crude (USD/bbl) 0 Source: Bloomberg 2
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 0.84. 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% 233 295 27% 102 159 56% 0.21 0.33 SABIC 35,564 32,449-9% 6,126 4,287-30% 3,935 2,888-27% 1.31 0.96 SAFCO 962 692-28% 583 314-46% 590 350-41% 1.42 0.84 SIIG 1,771 1,476-17% 230 325 41% 126 52-59% 0.28 0.11 SAHARA 261 302 16% (1,238) 36 na (50) 33 na (0.11) 0.22 YANSAB 1,717 1,657-3% 364 348-4% 285 281-1% 0.51 0.50 SIPCHEM 826 811-2% 177 68-62% 81 27-67% 0.22 0.07 ADVANCED 468 428-9% 100 112 12% 90 110 22% 0.55 0.67 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
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 2015 2016E 2015 2016E PETROCHEM 2002 16.60 7,968 20.00 Buy 3.0% 8.8x 9.2x 1.4x 1.3x SABIC 2010 74.25 222,750 68.00 Hold 5.4% 11.1x 16.7x 1.0x 1.1x SAFCO 2020 64.50 21,500 80.00 Hold 7.8% 12.6x 13.4x 3.0x 2.9x SIIG 2250 12.22 5,499 16.00 Buy 8.2% 7.5x 8.3x 0.8x 0.8x SAHARA 2260 8.35 3,664 12.00 Buy 4.8% 94.2x 21.3x 0.4x 0.4x YANSAB 2290 38.99 21,932 44.00 Buy 5.1% 18.1x 20.1x 1.4x 1.4x SIPCHEM 2310 13.05 4,785 12.00 Hold 3.8% 26.1x 26.1x 0.8x 0.8x ADVANCED 2330 41.05 6,732 38.50 Hold 6.7% 9.4x 11.0x 2.6x 2.5x SAUDI KAYAN 2350 5.06 7,590 7.00 Hold - na na 0.6x 0.6x PETRO RABIGH 2380 10.52 9,216 12.00 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
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
Stock Rating Strong Buy Buy Hold Sell Not Rated Expected Total Return 25% Expected Total Return 15% Expected Total Return < 15% Overvalued Under Review/ Restricted For feedback on our reports, please contact research@riyadcapital.com Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations. Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia ( KSA ). Website: www.riyadcapital.com