Sidpec seeks formula to face the challenges

What's Down: Sidi Kerir Petrochemicals of Egypt, also called Sidpec, had a stellar year in 2011, but a weakened global economic outlook could become a big challenge for the company.

Sidi Kerir Petrochemicals of Egypt had a stellar year last year, but a weakened global economic outlook is likely to be a big challenge for the company, analysts say.

Also known as Sidpec, it is the sole producer of ethylene and polyethylene in Egypt. Its main export market is Europe.

"Over the past couple of months, demand for ethylene has been weak as consumer demand for downstream polymers and other derivative products remained subdued," said Ahmed Hafez, a senior analyst at HC Securities in Cairo.

"Petrochemicals prices have declined by 24 per cent," Mr Hafez said.

Sidpec's production process begins with feedstock in the form of an ethane-propane mixture bought from Egyptian Natural Gas through a favourable arrangement for Sidpec, which then converts it into ethylene.

The output is processed to make high and low-density polyethylene, naphtha, butane and liquefied natural gas.

Sidpec is expensively valued, trading at 8.5 times earnings, Mr Hafez said. The company's shares, which were mostly flat last year, outperformed Egypt's stock market by almost 50 per cent. An improvement in the political environment is unlikely to boost Sidpec's stock, Mr Hafez said.

Sidpec trades at a discount to its regional peers, but for good reason given its higher cost of capital. The company "has a higher tax rate and is a single plant, single product company", Mr Hafez said.

He downgraded Sidpec to "neutral" from "overweight" and cut the price target by 20 per cent to 13.6 Egyptian pounds a share. The stock declined 0.5 per cent to 13.83 pounds yesterday on the Egyptian Exchange.

Sidpec announced in October it had entered into a 7 billion pound joint venture with two Egyptian government-owned companies to build an ethylene plant with a capacity to produce 460,000 tonnes a year. Sidpec will own 20 per cent of the company.

"With the new cracker expected to start operations in two years, we believe it is still too early for the market to price it in and we therefore continue to exclude it from our forecasts," Mr Hafez said.

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