SABIC Company Analysis - Research Paper Example

SABIC Company Analysis. Ticker: ● SAI Recommendation: increase estimates Price: ● 96.25 Price Target: 185 Highlights The earnings per share has improved for the last three consecutive years. On the other hand, the price earnings has declined for the three years. Therefor the estimate is 11.07 for earnings per share and a reduction of 1.88 for P/E ratio giving an estimate of 8.0. The share price has fallen by SAR 90 from highs of SAR 185 to SAR 96. However, the constant growth of revenues will show an upward trend in earnings per share and a reduction on price earnings ratio. Business Description Saudi Basic Industries Corporation (SABIC), is one of the world’s leading manufacturer of chemical products, fertilizers, plastics and metals founded in 1976. It offers its products and services all over the world. The regional sites are the Middle East and Africa, Asia, America an Europe. SABIC is the largest and most profitable non-oil producing company in the middlie east. It is ranked in the fifth position largest world petrochemical manufacturer. It is committed to satisfying its customers through achieving individual initiatives. This is enhanced through adherence of strict safety and environmental policies. The high investment in technology and innovation facilitates the ongoing development. The management is committed in running the business and achieveing sustainability through providing services and products that meet stakeholder’s expectations as well as conduct business with respect and care for the environment. Regulations are followed at all times and they apply practical means to conserve resources and reduce waste, avoid pollution in order to minimize risks involved in their operaions. Quality of products and services is maintained at all times. Industry Overview and Competitive Positioning SABIC is in the petrochemical industries and is the five largest in the world. The company has had strict safety and environmental responsibility. It has incorporated sustainability in its day to day business activities. Its reports are integrated clear showing the environmental and social impact of the company in the various regions. This is through reducing waste, preventing pollution, catering for customers needs. The company has 33,000 employees for the last four years in 40 countries. Its culture is to cater for the ever growing needs of the customers. This responsibility has opened up avenues for innovations and technological advances. The T & I facilities are found all over the world with highly talented expects and scientists who are devoted in bring new patents and certifications. The company is always focused in to the future thus technology is heavily invested into. The competitive edge of this company is effected by the rapid growth and spread regionally and global (Maurice et al, 2009). The services and products as well as sales facilities are found in all the oprating units in the five regions. This creates an enabling environment for increased revenues since the target market is huge. The revenue currently stands at the highest for the last six years i.e. 190,592. The growth is projected at 20,000 on an annual basis. Investment Summary The ratio analysis indicate that this company is performing well. The return on shareholders fund has improved for the last four years. The current ratio is above and on an increasing trend. The solvency and profit margin ratios have improved for the last four consecutive years. However the decline in price earnings ratio indicates that the share price of this company is falling. This may be caused by the high borrowings and low equity financing. The price of shares has had highs of 184 and currently stands at 96. This is rapidliy going down. The investor confidence for this company is reducing gradually. Valuation The valuation for this company is financial ratios. The trend analysis for the five years also is a good indicator of financial performance, a downward trend in shares price discourages investors from purchasing shares. Trends tip the investment decisions (James, 2001). The share price stood at SAR184.58 in 2008 and has fallen to SAR102 currently. The high gearing and other business risk may be a course of concern. However, solvency and rapid growth of this company is stable indicating good performance. (Per & Klaus, 2009). Financial Analysis Income statement The chemical line has the highest earnings of 218,725,232 compared to metal amounts of 15,532,317, and fertilizers at 8,654,188. Head office sales stands at 17,876,726. The current total revenue increment is 25.2% from 2010. The market price of the shares has decreased from 165.42 in 2007 to lows of 96.25 in 2011. However the earnings per shares has increased from 9.01 to 9.75 in 2011. The company is running on negative cashflows in the last quarter of 2011. This deficit is carried forward from 2010 at a figure of -6549. The balance sheet SABIC analysis shows that equity is less than debts for the last five years. Capital stands at 30,000 for the last five years and debts is constantly decreasing but at minimal figure, i.e. 100,538, 94,747 and 88750 from 2009 to 2011. The four quarters of 2011 has had a decrease of 9,000 hence an estimate of 15,000 is expected in 2012 in the debt figure. The company is currently finacing is activities with borrowings. Debt to equity ratio of 1.41 in 2011 is compared to industry cover of 52. However the longterm debts are decreasing annually indicating that SABIC is able to finance its debt capacity. The assets of the company have fluctuated over the years however, there is no clear indication of massive disposals undertaken. The fixed assets are more than currents. Assets turnover stands at 1.75 compared to the industry cover of 10. Overall the company’s performance is good and within the industrial range. Chervlon Phillips chemical one of SABIC’s competitors has had 33% annual growth in its revenue and capital financing $5.8B and a debt ratio of 15% and BASF that has a 16.5% in annual growth and debt to equity of 33.87% compared to 25.2% of SABIC. The analysis shows SABIC is a better company in growth and low debt to equity ratio. Dividend growth The company has constantly paid dividends for the last five years. The dividend per share has increased for the last three years from 1.5 to 3. This indicates the growth in the company earnings and reliability in paying dividends to shareholders. BASF SE currently stands at higher dividend per share of €2.5. Investment Risks The share price is constantly fructuating for the last four years. However the increase in earnings is channeled towards clearing the debts. This increases the risks in further reduction of shares in the next years to come. The high debt financing is detrimental to the liquidity position of the company hence care needs to be taken when investing in SABIC. Business risk presents itself in this case due to the high amounts of borrowings. Nonetheless inflation could cause a major threat for the company’s share prices. This is the reason behind the trend of share price decrease over the last four years. SABIC is not facing valuation risks since its share value is normally valued in the market. This is because the earnings go hand in with price of the share taking other factors in mind i.e. debt issues, stability in dividend payments etc. There is need therefore to be cautious of these risks (Frank & Keith, 2011; Virginia & Kenneth, 2005). Nonetheless SABIC has always paid dividend constantly. The lack of dividend growth is an indicator of poor management. Ownership of SABIC clearly reduce the investment risk because 70% is owned by the government – funds the company even in distress. (Note: figures in million RAR)Reference Company analysis retrieved from http://www.sabic.com/corporate/en/ourcompany/default.aspx on 21/4/2012. Frank K. R. & Keith C. B., 2011. Investment Analysis and Portfolio Management, 10th ED. Cengage Learning, London. pg. 461 James R. E, 2001. Applied Equity Analysis: Stock Valuation Techniques for Wall Street Professionals, McGraw-Hill Professional, New York. Pg. 6 Maurice P., Roger E. G. & Roger G., 2004. Company Accounts: Analysis, Interpretation And Understanding, 6th ED. Cengage Learning EMEA, London. Pg.15 Per V. J. & Klaus S., 2009.Market Intelligence: Building Strategic Insight, Copenhagen Business School Press DK, California. Pg. 86 Virginia B. M. & Kenneth M. M., 2005. Investing Essentials, Lightbulb Press, Inc., NewYork. Pg.21 Read More