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SABIC is set to benefit from its expanding production base


SABIC, Saudi Basic Industries Corporation, is expected to benefit from its expanding production base, improving petrochemical and fertiliser prices and growing demand, according to a new report by the Saudi bank, NCB Capital (NCBC).

The main reason for the banks optimism on SABIC's outlook is the commencement of Saudi Kayan's plants in Q3 2011. As a result NCBC continues to view SABIC rating as Overweight with a price target of US$33.9.

• Planned shutdowns to lower production volumes in 2011

During 2011, SABIC has scheduled maintenance capex at its methanol plants of Saudi Methanol Co (capacity of 2.6mn mtpa) and its MEG plants of Jubail United Petrochemical Co (1.3mn mtpa), Yanbu National Petrochemical Co (770k mtpa), Saudi Yanbu Petrochemical Co (900k mtpa) and Eastern Petrochemical Co (900k mtpa). The bank believes that these shutdowns at SABIC's facilities will result in a YoY production loss of 1.2 per cent in 2011.

• Petrochemical prices to remain firm in 2011

With oil hovering above US$100/bbl, NCBC expects petrochemical prices to strengthen in 2011. The report predicts that ethylene prices to go up by 15 per cent YoY in 2011 and polyethylene by 6 per cent, while propylene prices are expected to grow by 13 per cent and polypropylene up 6 per cent.

•NCBC projects SABIC's average selling prices for petrochemical products to increase 14.9 per cent YoY in 2011.The banks remains optimistic on 2011 prices for fertilizers selling prices (up 14.2 per cent YoY) and metals (up 19.6 per cent YoY) and expect 2011 earnings to grow by 33.7 per cent YoY.

• Contribution from new capacities to drive growth

In 2011, SABIC is set to benefit from full year contribution of new capacities which started operations in 2010 as well as the commercial start of key units of Saudi Kayan in Q3 2011. The report projects SABIC's 2011 net income to come in at US$9 billion (up 33.7 per cent YoY).

• NCBC views SAIC as Overweight with the revised target price of US$33.9 NCBC have lowered their price target as risk premiums are increased (factoring in the ongoing regional political instability). However, the bank believes that these issues does not have any direct impact on SABIC's business given its strong global presence. An indirect impact could be the general risk of a slowdown in global economy due to rising oil prices. The stock is currently trading at a 2011E P/E of 10.5x and 2011E EV/EBITDA of 6.5x.