Portfolio Optimization And Sustainability Initiatives Will Foster Future Competitiveness

Key Takeaways

• SABIC's portfolio optimization and asset divestment strategy aims to enhance capital efficiency and future net margins by investing in high-margin opportunities.
  
• Innovation and sustainability initiatives, such as carbon capture and recyclable solar installations, are positioned to bolster SABIC's competitive stance and long-term growth.
  
• Overcapacity and weak demand in petrochemicals, along with market volatility, threaten SABIC's revenue growth, net margins, and financial stability.

Catalysts

Engages in the manufacture, marketing, and distribution of chemicals, polymers, plastics, agri-nutrients, and metal products worldwide.

• SABIC's strategic focus on portfolio optimization and divestment of non-core and underperforming assets, such as the sale of its Alba shares and other assets, is expected to free up capital for investment in higher-margin opportunities and improve capital efficiency, potentially increasing future net margins and net income.
  
• The ongoing projects, including the SABIC Fujian Petrochemical Complex, MTBE plant at Petrokemya Jubail, and the expansion at SABIC SK NEXLENE Company, are anticipated to drive revenue growth through increased production capacity and meeting rising demand in specific sectors.
  
• SABIC's commitment to innovation and sustainability, evident from advancements such as the world's largest solar installation using fully recyclable materials and the development of innovative materials and processes, is likely to enhance competitive position and support long-term revenue growth.
  
• The focus on capturing and utilizing carbon emissions, and potential sequestration developments, could reduce operational costs related to emissions management and enhance SABIC's sustainability credentials, potentially leading to improved net margins.
  
• SABIC's robust cash flow generation and disciplined capital expenditure (CapEx) approach ensure sufficient resources are directed to strategic growth projects, which supports future earnings growth through maintained or increased production efficiency and capacity expansion.

Saudi Basic Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saudi Basic Industries's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.8% today to 10.6% in 3 years time.
• Analysts expect earnings to reach SAR 17.4 billion (and earnings per share of SAR 5.73) by about December 2027, up from SAR 2.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SAR 12.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.1x on those 2027 earnings, down from 84.4x today. This future PE is greater than the current PE for the SA Chemicals industry at 22.3x.
• Analysts expect the number of shares outstanding to grow by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.77%, as per the Simply Wall St company report.

Saudi Basic Industries Future Earnings Per Share Growth

Risks

• Overcapacity and weak demand in the petrochemical industry present ongoing challenges, potentially pressuring SABIC's revenues and EBITDA margins.
  
• Declines in average selling prices for certain product lines, despite increased sales volumes, might erode net margins and impact earnings growth.
  
• Rationalization and closure of assets, especially in Europe, could incur restructuring costs and affect near-term profitability and cash flow.
  
• Lower CapEx guidance suggests possible delays or downsizing in growth projects, which could limit long-term revenue expansion and competitive positioning.
  
• Market volatility, especially in regions like Europe, combined with uncertainty in global demand recovery, can result in fluctuating net income and financial instability.

Valuation

• The analysts have a consensus price target of SAR 83.68 for Saudi Basic Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SAR 99.0, and the most bearish reporting a price target of just SAR 69.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SAR 164.6 billion, earnings will come to SAR 17.4 billion, and it would be trading on a PE ratio of 25.1x, assuming you use a discount rate of 19.8%.
• Given the current share price of SAR 69.5, the analyst's price target of SAR 83.68 is 17.0% higher.
• 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.