Gloomy outlook for Saudi petrochemicals

February 25, 2025, 2:45 AM

Sabic's Product Application and Development Center in Riyadh. Sabic was one of the few Saudi petrochemical companies to report improved earnings in the first nine months of 2024

Q4 earnings reduction expected
Downturn in global sector
Most interest from retail investors

Saudi Arabia’s 10 listed petrochemical companies are likely to report lacklustre earnings for the fourth quarter of 2024 because of an ongoing downturn in the global chemicals industry, analysts predict.

The sector’s prolonged malaise means they are likely to be of little interest to international institutional investors – although all enjoy significant cost advantages over competitors in Europe and Asia, excluding China, through access to cheap feedstock.

Trading in the likes of Saudi Basic Industries Corp (Sabic), the world’s sixth-largest petrochemical operation by market cap according to companiesmarketcap.com, is now largely the preserve of retail investors seeking to make a quick profit as stock prices fluctuate.

Sabic was the standout performer in the kingdom last year, posting a 42 percent rise in nine-month net profit to $1.1 billion, while Yanbu National Petrochemical Co – a Sabic subsidiary – and Basic Chemical Industries Co both posted a net profit from a net loss in the year-earlier period.

Sabic’s petrochemical EBITDA margin, a measure of core profitability, was 13.6 percent in the third quarter. This will probably fall to 13.3 percent in the fourth quarter, says Oliver Connor, director of Mena energy research at Citigroup in London.

“If pricing and costs remain flat, margins will flatline also,” he says. “There is a risk that margins could decline further if economic growth weakens, there’s a collapse in oil prices or greater-than-expected capacity is added.”

Sabic will hold a fourth-quarter earnings call on February 26.

Most Saudi Arabian petrochemical producers are likely to report a decline in profit compared with the third quarter because of rising feedstock prices and lower product sales prices, says Yousef Husseini, director of chemical equity research at EFG Hermes in Cairo.

Only three of Saudi Arabia’s 10 listed petrochemical companies – Sabic among them – reported improved earnings in the first nine months of 2024 versus the same period of 2023, AGBI research shows.

“The sector has been in the doldrums for so long that even the good quarters are not that great from a historical perspective, so investors are looking for a broader trigger for the industry to rebound rather than necessarily being focused on quarter-by-quarter results,” Husseini says.

Lower margins in the final quarter of the year are usual as customers consume existing inventories rather than buy more in the market.

Sabic’s petrochemical EBITDA margin will probably remain at about 14 percent in the first half of this year, Citigroup’s Connor says. Historically, this has averaged around 20 percent.

In terms of fourth-quarter net profit, Sabic should benefit from improving earnings at its subsidiary Sabic Agri-Nutrients Co, as well as from lower finance costs and taxes, but these are all gains on the bottom line; its operating profit will fall because of declining margins, says Connor.

Stock price decline

All 10 petrochemical producers’ stock prices declined over the 12 months to February 19. Seven fell by double digits, among them Sabic (-17 percent), Sipchem (-30 percent) and Saudi Kayan (-32 percent).

These drops mean that “not only is a deterioration in fourth-quarter results already priced in, but investors are also no longer as reactive to quarterly earnings”, says EFG’s Husseini.

The sustained stock price slump means that further selling pressure is unlikely to be strong, says Husseini. Sabic ended February 19 at SAR65.4 per share.

“If Sabic falls to 60, retail investors will pile in because the stock becomes too cheap for them to ignore,” says Husseini. “These are short-term investors looking for a quick gain so sell once they’ve made a few percent.”

It is likely that Sabic’s stock price will stick in the SAR60 to 70 price range until there is a material improvement in the operating environment; institutional investors have little exposure to the sector, Husseini says.

Price-to-earnings ratios in the Saudi petrochemicals sector have soared as profits have ebbed. Sabic’s is 116, Yansab’s is 43.9 and Advanced Petrochemical Co and National Industrialization Co (Tasnee) each have PE ratios above 100.

Sabic’s stock trades at a book value of 1.2 and a return on equity of 8 percent, which is arguably below its cost of capital.

“Sabic is a long-term play as a low-cost producer with a good balance sheet that’s integral to the Saudi energy value chain,” says Connor. “But if you’re an equity investor on a two-year investment timeframe it’s hard to get excited, which is why the share price has behaved like it has of late.”