Saudi Petrochemicals - NCBC

Investment scenariosValuation can increase significantly with lower costand higher pricesHistorical and expected price performance2530Scenario analysis(SR)20151058.23.82.51.315.81.90.92.621.325201521.315.80DCF Bear caseWACC increases by 2%Realization declines by3%Cost rises by 3%DCF BasecaseUtilization grow by 5%Cost reduces by 2%Realization grows by 3%DCF Bull case108.250Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11Historical Price PerformancePrice TargetSource: NCBC Research estimatesSource: NCBC Research estimatesInvestment view• No top line to be reported untill 2012: Plants will becommercially operational in 2Q 2012e with 2012 featuringonly 9 months of production. Full year revenues will start in2013e.• Net losses till 2011e: Given no sales until 2012e,Petrochem will be incurring net losses during 2010e and2011e, mostly from interest expenses, we believe.• Capacity oversupply in the region a risk: Polyethyleneand polypropylene will account for close to 88% ofPetrochem’s external sale volumes. Capacity oversupply inthese markets is a possibility given the aggressive capextaken by KSA players in extending their ethylene andpropylene derivatives capacities.• Low cost structure: The availability of low cost feedstockto Petrochem helps in competing with global peers, but notversus other KSA players which enjoy the same feedstockadvantage.• Association with Chevron a positive: Petrochem’s JVpartner, Chevron Phillips Petrochemical Company, bringsstrong marketing benefits as it has entered into an off-takeagreement with Petrochem to off take and sell all unsoldproductionPotential catalysts• Earlier then expected start in production: If Petrochemcommences operations earlier then our estimated 2Q 2012,this would act as a positive trigger to the stock as well asearlier reporting of profits and revenues.DCF scenarios• Price • Weighting of DCF is 100%target:SR 15.8• DCF bullcase:SR 21.3• Assuming higher prices and higherutilization rates due to a faster demandrecovery. Also assuming lower costs andexpanding margins. Net income ofSR1.34bn expected in 2013e.• DCF base • We expect operating rates and prices tocase:SR 15.8improve gradually in coming years.However, aggressive capacity additions areexpected to outpace the demand recoverythus denting operating rates and pricesfrom 2014e onwards. We assume netincome of SR1.1bn in 2013e.• DCF bear • Lower prices and weaker utilization due tocase:intensified competition. Also twoSR 8.2 percentage points higher WACC. Netincome of SR0.91bn expected in 2013e.Risks to our view• Higher then expected rise in feedstock prices could dentprofitability• Once operational, anti dumping claims by Asian traderscould burden Petrochem’s cost structure with additionalcharges.27 April 2010 PETROCHEM - INITIATING COVERAGE59