SIDPEC shares look primed for rebound

Experts say company well set for recovery

Sidi Kerir Petrochemicals Company (SIDPEC) could be the best value in a sector that is out of favour with investors at the moment. The Egyptian petrochemicals maker this year has delivered better returns than major global petrochemicals companies and has outperformed the Egyptian equities market as well. But in the past four weeks since crude prices retreated amid euro zone debt woes and fears of a decline in oil demand, SIDPEC shares have taken a beating.

Analysts at Al Futtaim HC Securities think the sharp drops leave SIDPEC set up "nicely for recovery". Given that SIDPEC has a defensive business model, lower dependence on exports, higher dividend yields and a natural currency hedge, HC Securities sees a potential for a more than 50 per cent gain in share price and recommends a target price of 16.7 Egyptian pounds. That is a notch above the 16 pound target price suggested by the brokerage Prime Holding, which rated SIDPEC a "strong buy" in a note to investors last month.

SIDPEC shares closed up 3 per cent at 11.01 Egyptian pounds yesterday on Cairo's bourse, but that was more than 22 per cent lower than the price at the start of last month. But they are 7.4 per cent higher than at the end of May last year. HC Securities said current prices implied a very "bearish outlook". To justify the current valuation, petrochemicals prices needed to fall by more than 30 per cent, and there needed to be a hefty reduction in operating rates, or plant capacity, in the long term.

"Reduction in operating rates to below 95 per cent looks unlikely in the long term given that the company has never operated below this level, even under crisis conditions in 2008 and 2009," HC Securities said in a note to investors yesterday. The oil price volatility in recent weeks has hammered stock markets across the MENA region, causing sharp declines in oil and petrochemicals stocks. But oil has strengthened in recent days, with light sweet crude for delivery in July adding 37 cents to $74.34 in New York.

SIDPEC's current share price implies crude oil prices of less than $60 a barrel, HC Securities noted. [e-mail]