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Sabic's profits fall but its value remains high

What's Up: Investors may be disapptoined with Sabic's fourth quarter earnings decline, but it is unlikely to deter them.

Saudi Arabian Basic Industries Corporation (Sabic) disappointed investors with a marked decline in fourth quarter profits.

Net income fell by more than a third compared with the previous quarter to 5.24 billion Saudi riyals, a 10 per cent decline compared to a year earlier.

Analysts attribute the profit slump to the economic woes in the euro zone, which tilted towards recession at the end of last year, and a destocking that undermined demand for new product.

Europe's malaise is set to continue, with the IMF predicting a mild recession this year.

But neither the earnings results nor the European economic outlook has done much to diminish the value of the company in the opinion of brokerage houses.

Sabic stock continues to be rated "overweight" in reports by JPMorgan Cazenove and Al Rajhi Capital, and Rasmala has reiterated its "buy" recommendation.

Sabic's share price is low by historic standards, and the world's largest producer of petrochemicals could be a major beneficiary of a change of regulation allowing foreign investments on the Tadawul, the Saudi stock exchange, said Cazenove. The company continues to perform well compared with its Saudi peers. Sabic's exposure to Europe is balanced by a largely positive outlook for Asia, the largest recipient of the company's petrochemical product.

In addition, the IMF forecasts the US will avoid recession, and oil prices are expected to hold up.

"Given what looks like some improvement in the US economy, a relatively soft landing in China, likely firm oil prices and our view of chemical cycles tightening going forwards, we are not unduly worried by the miss," said Alex Comer, an analyst at Cazenove.

He said Sabic's start to this year would be weaker than previously forecast by Rasmala, as the company was weighed down by low utilisation rates of its European assets. But a dearth of supply would lead to global prices picking up in the second half of the year, he said.

Mohamed Al Mady, the chief executive of Sabic, gave a similar outlook in a recent interview.

Early price indications are positive, with polymer up 5 per cent on the Dalian, the Chinese commodity exchange.


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