Saudi Petrochemicals - NCBC

Investment viewNET LOSSES UNTIL 2011E, WITH NO REVENUE UNTIL 2012EWe expect Petrochem’s plants to become commercially operational from 2Q12,meaning the company will be in losses until then and 2012e figures will haverevenues for only 9 months of production. A full year of production, revenues andsubsequent earnings will only begin from 2013e, we expect.We believe revenues will contract slightly after 2013e driven by a leveling out inprices and contracting utilization rates. This outlook is in-line with our concerns onglobal over capacity during this time frame as large capacity additions continue inthe overall market. We anticipate that utilization rates will contract to 95% in2014e and 90% in 2015e.With production commencing in 2012, we expect Petrochem will be incurring netlosses during 2010e and 2011e due to its interest expenses. After strong netincome growth in 2012e and 2013e, we expect net income to contract in 2014e and2015e as a result of the decreasing utilization rate.FORAY IN ETHYLENE AND PROPYLENE PRODUCT LINE OFFERSLIMITED GROWTH OPPORTUNITIESPolyethylene and polypropylene will account for close to 88% of Petrochem’sexternal sale volumes, we believe. Given the aggressive capacity additions plannedby most of the Saudi players in extending their ethylene and propylene derivativescapacities, we believe Petrochem will be entering into a market facing overcapacity.This could restrict any price recovery in the polyethylene and polypropylenemarkets in forthcoming years. In addition, Petrochem’s dependency on theseproduct lines is concerning when most of its peers are diversifying into differentvalue-added derivatives with a larger capacity base. We therefore remain slightlyapprehensive over Petrochem’s ability to outperform its Saudi peers in terms ofearnings generation capabilities in the coming years.LIMITED HEAD ROOM WITH VALUE ALREADY PRICED INIn the near term, we do not see any strong price catalysts given that the companyis currently in pre-operational stage. Moreover, as the stock price is already up42.9%, outpacing the 19.3% rise in TASI index, from its listing on 08 August 2009,and the pre-operational status, we believe the stock is looking expensive. Ourvaluation and price target of SR15.8/share indicates 15.1% downside and drivesour Underweight rating.27 April 2010 PETROCHEM - INITIATING COVERAGE60