HSBC boosts Dow Chemical profit estimates

16 November 2007 22:26  [Source: ICIS news]

TORONTO (ICIS news)--HSBC on Friday sharply raised its earnings per share (EPS) estimates for Dow Chemical primarily due continued strength at the company’s feedstock-advantaged equity affiliates in Kuwait, Malaysia and elsewhere.

 

The analysts raised their EPS forecast to $3.00, from $2.15 for 2008, and to $2.35, from $1.55, for 2009.

 

Dow’s equity affiliates include Equate Petrochemical Co, MEGlobal and Optimal.

 

The analysts said Dow’s share price was relatively cheap, given the company’s significant cash reserves and options for “corporate action,” which included returning cash to shareholders as well as joint ventures or bolt-on acquisitions, particularly in specialty chemicals.

 

“We believe a large specialty chemicals deal would reflect a break in exposure to cyclicality,” the London-based international bank said.

 

Dow’s management, while repeatedly emphasising its asset-light strategy and the resilience of its earnings come the next trough, to date had demonstrated strong reluctance to boost its dividend or initiate a large share buyback, the analysts said.

 

“We believe that the onus now appears to be on management to address investor concerns surrounding cash usage” they said.

 

Going forward, the analysts pointed to the planned Ras Tanura joint venture project with Saudi Aramco as a big component of Dow’s asset-light strategy.

 

Ras Tanura - likely be one of the largest integrated commodity chemical complexes in the world – should help Dow reduce capital intensity and risk through a partner while gaining access to competitive feedstocks and a valuable export position, the analysts said.

 

HSBC rates Dow’s shares “overweight” with a target price of $55.

 

The stock was priced at $40.36 in early Friday afternoon trading in New York, down marginally by 0.15% from Thursday's closing.

 

($1 = €0.68)

By: Stefan Baumgarten
+1 713 525 2653

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