Chems to continue outperforming market in 2011 – US analyst

03 January 2011 21:03  [Source: ICIS news]

US chems will likely outpace broader marketNEW YORK (ICIS)--The chemical sector is poised to continue outperforming broader financial markets in 2011 after a strong 2010, as fears about earnings and margin deterioration are overblown, a US analyst said on Monday.

“We expect this sector outperformance to continue in the near-to-medium term as global utilisation rates tighten in the 2011 through 2014 timeframe,” said Hassan Ahmed, partner and head of research at US-based investment research firm Alembic Global Advisors.

“Our analysis suggests commodity chemical share prices could essentially double from current levels to attain prior peak levels,” he added.

The analyst is particularly bullish on Brazil’s Braskem, US-based Celanese, US-based Dow Chemical, Netherlands-based LyondellBasell and Canada’s Methanex.

Ahmed said that contrary to consensus, he expects global ethylene utilisation rates to rise in 2011 and beyond, resulting in higher margins.

Specifically, he expects ethylene utilisation rates to average 86.7% in 2011, 88.8% in 2012, 90.3% in 2013 and 91.6% in 2014 – up from an estimated 86.5% in 2010.

Ahmed expects petrochemical producers with plants in the US to benefit from an oversupply of ethane feedstock resulting from shale gas.

He also dismissed the argument that plant outages had much to do with the chemical sector outperforming the market in 2010, noting that US outages were in line with the 17-year average.

“Finally, we believe that most market participants are overly focused on the near term, without paying much heed to the earnings leverage enjoyed by commodity chemical companies during an up-cycle,” said Ahmed.

“We believe that the commodity-chemical-biased companies under our coverage - Dow, LyondellBasell and Westlake - could each see their earnings essentially double from 2010 levels in a cyclical peak, implying that these names are currently trading at around 2.0 times peak EV-to-EBITDA [enterprise value to earnings before interest, tax, depreciation and amortisation],” he added.

The analyst raised 2011 earnings per share (EPS) estimates for a slew of chemical companies, including Braskem, DuPont, Huntsman, LyondellBasell and Westlake Chemical.

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By: Joseph Chang
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