EUR 83.51 For Business Accounts Only

SIPCHEM AB | Share price drop justified; Maintain Neutral

Current share price implies oil price recovery to USD50/bbl. We cut our TP by 22.2%, as we reflect: i) heavy pricing pressures over 2020-21e, ii) a lower sustainable oil price of USD50/bbl, starting 2022e (matching US shale oil breakeven price), and iii) a 1% higher equity risk premium amid heightened risk aversion. Sipchem’s share price drop captures both short-term headwinds and medium to long-term recovery prospects, in our view, trading on a 2020e EV/EBITDA of 8.7x, normalising at 5x by 2023e, in line with the historical levels, the global average, and our DCF valuation, based on an oil price recovery to USD50/bbl.

Short-term pricing pressures; Gradual recovery in the medium and long-term. In the short-term, we expect the mix of the global pricing drop and heavy operating and financial leverage to result in the incursion of marginal losses in 2020e. This is based on a USD40/bbl oil price and average capacity utilisation of 88%. In the medium to long-term, we assume gradual pricing recovery beyond 2020e, with gradual recovery of the oil price to USD50/bbl in 2022e and average capacity utilisation rising to 96%, leading to a 2023-27e average income of SAR733mn p.a..

Limited balance sheet pressures, but dividends at risk. We expect little change in the company’s balance sheet, with deleveraging uninterrupted (SAR448mn in net debt reduction p.a. starting 2021e). However, we predict Sipchem’s short to medium-term profitability pressures will lead to a substantial dividend cut of 61%, leading to a DPS of SAR0.23e in 2020e and SAR0.34 in 2021e, yielding 1.6% and 2.4%, respectively, vs. 3.7% for global peers and 0.71% for the Saudi market.

Risks skewed to the downside. We assume a square root-shaped recovery (based on a gradual recovery in global oil demand and economic activity), meaning a prolonged oil market crash and/or global recession could leave the company cash strapped with a worsening balance sheet. Otherwise, every 5% higher/lower oil price assumption p.a. adds/deducts 7.14% to our TP, all else constant. Meanwhile, every 5% higher/lower capacity utilisation p.a. raises our TP by 28.5%, all else constant.