Tightening Environmental Rules And Oversupply Will Squeeze Margins

Key Takeaways

• Heightened regulation, recycling trends, and global oversupply are set to weaken demand and compress margins for SABIC's core petrochemical products.
  
• Reliance on subsidies and large capital projects increases SABIC's exposure to profitability risks and pressures shareholder returns.
  
• Strategic transformation, digital initiatives, portfolio optimization, new product launches, and timely expansion projects position SABIC for improved margins, operational efficiency, and long-term growth.

Catalysts

Manufactures, markets, and distributes chemicals, polymers, plastics, and agri-nutrients worldwide.

• Intensifying global efforts to impose strict environmental regulations and accelerate decarbonization policies are poised to significantly raise compliance costs and restrict market access for traditional petrochemical products, which will erode revenue and squeeze net margins over the long term.
  
• Societal push for recycling, circular solutions and biodegradable alternatives is set to cannibalize demand for core plastics and chemicals in SABIC's portfolio, driving downward pressure on future sales volumes and contributing to stagnation or decline in earnings.
  
• Continued overreliance on subsidized domestic feedstock pricing leaves the company exposed to subsidy reforms, which would dramatically compress gross margins and undermine overall profitability in Saudi Arabia.
  
• The industry's persistent global oversupply of basic commodity chemicals, exacerbated by new capacity in Asia and North America, shows no signs of abating, promising ongoing margin pressure and a challenging path for EBITDA and earnings recovery.
  
• Ongoing capital-intensive project pipeline and a slow shift away from commodity chemicals increase the risk of cost overruns, delays and underperformance relative to global peers, threatening free cash flow generation and raising the risk of further dividend cuts or lower shareholder returns over time.

Saudi Basic Industries Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Saudi Basic Industries compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Saudi Basic Industries's revenue will decrease by 0.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.2% today to 4.7% in 3 years time.
• The bearish analysts expect earnings to reach SAR 6.7 billion (and earnings per share of SAR 2.25) by about August 2028, up from SAR 252.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 40.0x on those 2028 earnings, down from 689.2x today. This future PE is lower than the current PE for the SA Chemicals industry at 56.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.95%, as per the Simply Wall St company report.

Saudi Basic Industries Future Earnings Per Share Growth

Risks

• SABIC's aggressive transformation program targeting three billion dollars of recurring annual EBITDA by 2030, anchored by both cost excellence and value creation, indicates a material improvement in profitability and margin outlook should initiatives succeed.
  
• The rapid progress in digital transformation-including deployment of nearly five hundred AI models in forty-two percent of manufacturing sites and a major ERP upgrade-suggests heightened operational efficiency and process automation that could lead to sustained cost reduction and improved net margins.
  
• Portfolio optimization actions, including divestment of underperforming assets and focused reallocation toward high-growth markets in Asia, demonstrate proactive capital discipline that could unlock value, boost return on capital employed, and support long-term earnings growth.
  
• SABIC's successful introduction of fifty-eight new products during the quarter and winning industry quality and innovation awards enhances its positioning in value-added segments, likely supporting stronger revenue streams and resilient competitive advantage in growing end markets.
  
• Expansion projects such as the SABIC Fujian Petrochemical Complex in China and the MTBE project in Saudi Arabia remain on schedule and on budget, pointing to future volume growth and the opportunity to capitalize on rising demand in key global markets, which could elevate revenues and overall profitability.

Valuation

• The assumed bearish price target for Saudi Basic Industries is SAR52.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Saudi Basic Industries's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SAR99.0, and the most bearish reporting a price target of just SAR52.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SAR144.8 billion, earnings will come to SAR6.7 billion, and it would be trading on a PE ratio of 40.0x, assuming you use a discount rate of 19.9%.
  
• Given the current share price of SAR57.95, the bearish analyst price target of SAR52.0 is 11.4% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.