KSA JEDDAH: MUSHTAQ AHMED & TAZEEM ANWAR
JEDDAH: Saudi Arabia with a production capacity of around 87 million tons per annum continued to maintain its leading position as one of the largest producers of petrochemicals.
But lower crude prices’ negative impact on the petrochemical prices was likely to remain in force by the end of first quarter-2015.
Consequently, the sector had to suffer a 20 percent revenue decline in a quarter. Efficient market hypothesis suggests that market prices are the best reflectors of the fundamental economic value of the firms
Interestingly, the Petrochemical index has decreased only 2.63 percent in Q1-2015 on the Saudi stock market.
More interestingly, the index has gained roughly 17 percent in current month sparked after a little stability in oil prices.Another sound reason is Capital Market Authority’s (CMA’s) decision of market opening to direct foreign investment in June.
Saudi Arabia is going to open its $532 billion stock market to direct foreign investment, which will enable the market to be more liquid
The question is why a 20 percent revenue reduction in a quarter tended to decrease only 2.63 percent of sector’s market value.Perhaps investors expect a growth in petrochemical sector due to several factors.
First, Saudi Arabia with 264 billion barrels of crude oil is considered to be the world’s largest reserve base, more than a quarter of the world’s proven oil reserves.
Second, low input prices help domestic producers to enjoy competitive advantage globally.
Third, Saudi companies are expanding their petrochemical production capacities.
There are around 60 petrochemicals projects currently in the pipeline.
A huge amount $91 billion has been reserved by the Kingdom to build new petrochemicals plants over the next 10 years, according to industry experts.However, Saudi petrochemical companies consolidating their financial position further show a diluted performance
Currently, the sector accounted for more than 23.7 percent of the total market capitalization on the Saudi Stock Exchange, reaching at the level of SR 503 billion roughly SABIC (Saudi Basic Industries Corp.) is the flagship company among 14 listed companies, representing 60.9 percent of the total value of petrochemical sector.
On Year-to-date basis, the sector’s index gained 15.61 percent, while benchmark Tadawul All share index grew by 16.56 percent. Advanced Petrochemical outdid rest of its peers as its market price appreciated around 48 percent since the start of 2015.
It was followed by Alujain Corporation and Sipchem, which advanced 44 percent and 36 percent respectively. The Kingdom’s 14 petrochemical companies all generated around SR 57 billion sales during first quarter 2015, a quarter-on-quarter decrease of twenty percent. Out of which, SR35.5 billion earned by SABIC, which equates nearly 62 percent of the aggregated value.
SABIC also reported a decline of 27.77 percent in sales compared with same period last year and 18.12 percent compared with the Q4-2014.Core operating profitability of petrochemical sector declined significantly, mainly due to decrease in sales.Total operating income for the first three months of 2015 reached SR7.87 billion compared with SR 14.78 billion for 1st quarter 2014, a decrease of 46.75 percent.
SABIC posted the biggest decline (43.66 percent) in operating income, showing SR6.13 billion for Q1, 2015. However, SIPCHEM’s operating income increased by 5.32 percent, achieving SR176.6 million during Q1 2015 compared with SR167.7 million of Q1, 2014.The operating margin of the sector reduced to 13.76 percent during first quarter 2015 compared with 18.37 percent of the same period last year.
The petrochemical sector managed to earn a net margin of 7.65 percent, generating SR4.38 billion as net Income during first quarter of 2015. The sector’s bottom line reduced more than fifty percent from the SR9.3 billion recorded in the year-earlier period.SABIC led the profitability, contributing SR3.9 billion or 89 percent of the consolidated value.
But its bottom line decreased by 38.92 percent as compared to Q1-2014, which is attributed to lower average sales prices despite the reduction in cost of sales.Furthermore, the heavyweight Saudi Arabian Fertilizers Co. (SAFCO) showed a maximum net profit margin of 61.3 percent.
Six companies including Saudi Kayan (-SR 591 million) suffered losses during first quarter 2015. Except NAMA, these companies were in reasonable profit a year-earlier period.Saudi-listed petrochemical companies’ total assets grew to SR 604.8 billion, recording a nominal growth of two percent as compared to previous quarter.
SABIC’s assets are amounting to SR 339 billion, a relative sector share of 56 percent.Advanced Petrochemicals and Petrorabigh remained prominent in terms of percentage growth of assets.Both companies recorded approx 20 percent higher value of total assets compared to corresponding period of previous year.— Mushtaq Ahmed and Tazeem Anwar are senior financial analysts at Zughaibi & Kabbani Financial Consultants.