“The ratings continue to reflect SABIC’s strong business profile and moderate leverage, as well as a one-notch uplift for assumed support from its controlling shareholder, the Kingdom of Saudi Arabia (KSA, ‘AA-‘/Stable), in line with the approach laid out in Fitch’s Parent and Subsidiary Rating Linkage Criteria,” Fitch in a statement said.
SABIC’s business profile is underpinned by it’s vertically integrated operations, state-of-the-art world scale production facilities and access to low cost natural gas feedstock in KSA. The latter translates into best-in-class profitability levels and robust cash flow generation through the cycle. This in turn strongly mitigates the inherent cyclicality in SABIC’s markets (petrochemicals, fertilisers, metals) and the cash flow impact of the large expansion projects undertaken by the group. SABIC spent SR97.5billion ($26b) on capex over 2007-2010 (19% of sales on average) and was able to absorb delays and cost overruns on some of its projects without any material impact on its credit metrics.
SABIC has announced new projects in the coming years, notably a 400ktpa elastomer production site in KSA through Kemya, its 50/50 JV with ExxonMobil Corporation (‘AAA’/Stable), and a 260ktpa polycarbonate plant in China through SSTPC, its 50/50 JV with China Petroleum and Chemical Corporation (Sinopec, ‘A-‘/Stable). Both projects are expected to start commercial operations in 2015. The resurgence of expansion capex, albeit at lower levels than in 2007-2010, will result in more protracted deleveraging profile than previously anticipated under Fitch’s forecasts, with FFO adjusted gross leverage around 2.2x in 2012 (1.6x previously expected) and 1.9x in 2013. In mitigation, Fitch notes that liquidity is expected to remain robust though the period, with net FFO leverage around or below 1.0x.
Fitch’s forecasts low double digit growth in revenues in 2011, reflecting sustained demand conditions and the ramping up of new capacity at Sharq, Yansab, SSTPC and Saudi Kayan. The agency projects a 2011 EBITDA margin roughly in line with Q1 levels (34%) on the back of high capacity utilisations and comparatively firm price levels y-o-y. In line with the trends observed across the chemicals sector, SABIC posted strong results in Q111. Sales and reported EBITDA were up 32% and 27%, respectively, on Q110, due to firm demand and strong raw material cost push. The group also benefited from a strong post restructuring recovery in the performance of Sabic Innovative Plastics (SIP). Free cash flow (FCF) was negative SAR4.9bn in Q111, down SAR4.8bn on Q110, primarily due to higher working capital requirements.
FCF is expected to turn positive in 2011, reflecting higher absolute levels of operating cash flows and lower investment requirements. Fitch’s base rating case conservatively forecasts low single digit growth in 2012, reflecting a softer demand and pricing environment, and a slight contraction in EBITDA margin to around 32%.
A key risk to Fitch’s forecasts is a return to recessionary market conditions, with slower growth in Asia, lower demand for petrochemical products against the backdrop of large capacity additions in the GCC region and China, and resulting pricing pressure and margin erosion. In the medium term, Fitch also notes that the ethane price of 0.75/mbtu currently enjoyed by Saudi petrochemical producers could increase, thus eroding their profitability. However, the agency believes that such a price hike would be unlikely to pose a threat to their competitiveness on the international markets.
Sustained positive FCF generation, further diversification into speciality chemicals and away from cyclicality, and FFO gross adjusted leverage maintained around 1.5x through the cycle could warrant a positive rating action. Conversely, sustained gross FFO leverage around 2.5x due to aggressive debt-funded expansion, material adverse revisions in the group’s feedstock supply arrangements, significant changes in its shareholder structure or any material impairment in SABIC’s control of its affiliates/joint-ventures and resulting ability to access/upstream cash could warrant a negative rating action.