Commodity price weakness priced-in; Initiate with Neutral
Trades in line with global petchem peers. Sipchem trades on a 2020e EV/EBITDA of 6.2x. We believe the current share price fairly accounts for both the global commodity price weakness (2020e oil price of 60/bbl, 24.9% below 10-year historical average) and Sipchem’s recent expansion, leaving limited upside for the stock. Sipchem’s healthy cash flow translates into an attractive dividend play, with a 2020e yield of 6% vs. 2.7% for global peers, limiting downside from the current levels.
Waning commodity prices to eat into 2019e profitability; Limited scope for improvements beyond. We expect Sipchem’s 2019 earnings to drop by c43.4%, due to falling global commodity prices (end-product prices to fall by c22% vs. an 8.3% drop in material costs). Sipchem operates its plants at close to 100%, and global commodity price weakness is expected to sustain beyond 2019e, meaning medium to long-term earnings growth is limited absent of capacity expansions/acquisitions.
Expansion strategy unclear. In May-19, Sipchem acquired 100% stake in Sahara Co., a major Saudi petchem company, in a share swap deal. While it adds to earnings (51.4% of 2020e net income), we believe the deal was overpriced, implying an erosion of SAR1.8bn in value (based on a USD60/bbl oil price). Meanwhile, IMC’s plant expansion was positive, representing 18.5% of our valuation The Saudi government plans to heavily expand the petchem sector (+USD112bn in planned projects in the pipeline), which can carry potential for Sipchem. However, this direction might be unclear amid global headwinds.
Risks. Every 5% p.a. lower operating rate forecasts reduces our TP by 20.5%, all else constant. Sipchem acquires its primary feedstock (c21% of material cost) at a fixed USD1.5/mmBtu. Every USD0.5/mmBtu lower/higher-than-estimated natural gas price p.a. raises/lowers our TP by 10%, all else constant. Alone, every 5% lower/higher-than-expected oil price cuts/raises our TP by 6.1%. Expansions in the high margin basic chemicals and polymers segments could be positive to valuation.
Saudi International Petrochemical is engaged to own, establish, operate and manage industrial projects specially those related to chemical and petrochemical industries.
CI Capital is a diversified financial services group and Egypt’s leading provider of leasing, microfinance, and investment banking products and services.
Through its headquarters in Cairo and presence in New York and Dubai, CI Capital offers a wide range of financial solutions to a diversified client base that include global and regional institutions and family offices, large corporates, SMEs, and high net worth and individual investors.
CI Capital leverages its full-fledged investment banking platform to provide market leading capital raising and M&A advisory, asset management, securities brokerage, custody and research. Through its subsidiary Corplease, CI Capital offers comprehensive leasing solutions, including finance and operating leases, and sale and leaseback, serving a wide range of corporate clients and SMEs. In addition, CI Capital offers microfinance lending through Egypt’s first licensed MFI, Reefy.
The Group has over 1,700 employees, led by a team of professionals who are among the most experienced in the industry, with complementary backgrounds and skill sets and a deep understanding of local market dynamics.
CI Capital has been recognized as the “Best Investment Bank in Egypt” by EMEA Finance for four years running from 2013-2016, and by Global Finance in 2014 and 2015.
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